Question

Bond A is puttable; bond B is not puttable. Investors will require a lower yield on...

Bond A is puttable; bond B is not puttable. Investors will require a lower yield on bond _____ and will pay ____ for the bond.

A.

B; more
B.

A; more
C.

A; less
D.

B; less
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Answer #1

Option (B) is correct.

Bond A is puttable bond. In case of puttable bond, the investors or bondholders can force the issuing company to redeem the bonds before maturity. There is a put option with these bonds which gives the bondholder the right to redeem them before maturity.When interest rate increases, the price of the bond decreases due to the inverse relationship between the interest rate and the bond price. When the bond price decreases, investors will demand early redemption of the bonds. This is the reason that they will accept the lower yield on bonds as they are protected in a way that if price of the bond decrease then they will get redemption of the bond before maturity.

Also because of this puttable option, the price of these bonds is more. The issuing company charges a small price of this put option also, besides the regular price of the bond.   

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