Exam Series 6 topic 1 question 62 discussion

Actual exam question from FINRA's Series 6

Question #: 62
Topic #: 1

[All Series 6 Questions]

Which of the following statements regarding callable bonds is false?

A. Callable bonds offer a higher yield than non-callable bonds, all else equal.
B. Investors in callable bonds are subject to prepayment risk.
C. The issuer of a callable bond is most likely to redeem the bond early when interest rates fall.
D. A callable bond protects the investor by allowing him to sell his bond back to the issuer and invest in another, similar-risk bond that pays a higher rate of

Show Suggested Answer

Suggested Answer: D 🗳️
Statement D is the false statement. A callable bond does not protect the investor by allowing him to sell his bond back to the issuer and invest in another, similar-risk bond that pays a higher rate of interest should the investor choose to do so. The investor does not have the option to redeem or not in the case of a callable bond. It is the issuing firm that has the option. Therefore, a callable bond must offer a higher-yield than similar non-callable bonds, and the investor in a callable bond is subject to prepayment risk. The bond is most likely to be redeemed when interest rates fall, in which case the issuer will want to call it in and replace it with a bond with a lower coupon rate.

by lolojepu at April 6, 2025, 1:14 a.m.

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