Which of the following statements is true regarding a callable bond?

Question: Which of the following statements is true regarding a callable bond?

Answer options:

• Investors typically demand a lower yield on callable bonds compared to non-callable bonds with similar characteristics.
• Callable bonds are less attractive to issuers if interest rates are expected to fall. ✅ The call feature grants the issuer the right to repurchase the bond at a specified price before maturity.
• Call protection periods increase the bond's effective duration.

Correct answer: The call feature grants the issuer the right to repurchase the bond at a specified price before maturity.

Explanation: A callable bond gives the issuer the option to buy back the bond before its scheduled maturity date, typically if interest rates decline, allowing them to refinance at a lower cost. Investors demand a higher yield for this embedded option.