Question

A callable bond must have a yield that is ____ to a similar non-callable bond.

a) higher

b) lower

c)equal

Answer 1

Callable Bonds and Non-Callable bonds are two types of bonds investors can invest in.

A Non- Callable bond is the one that is paid out only at maturity. Whereas, in a Callable bond the amount borrowed through it can be repaid by the company that has issued the bond, at any date before the maturity date.

Callable Bonds are generally riskier than Non-Callable Bonds and hence yields on Callable bonds are higher than Non- Callable bonds in order to compensate the investors for the higher risk.

Therefore, yields on callable bonds are higher than that on similar Non-Callable bonds, i.e. option (a) higher