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NEW QUESTION: 1
A company has a callable issue outstanding. If the volatility of interest rates increases, all of the following statements are true EXCEPT
A. the value of the callable bond increases.
B. the probability of call increases.
C. bond investors may lose the difference between the intrinsic value of the bond and its call price.
Value of a callable bond = Value of equivalent straight bond - Call option.
Option value increases when interest rate volatility increases. Since investors have written a call option, when the option value is subtracted, value of a callable bond decreases.
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