medium · Debt Capital Markets
Which of the following describes the behavior of a callable bond's duration as market yields fall and approach the call price?
- Effective duration decreases as the bond begins to behave more like a short-term instrument maturing on the call date.
- Duration remains constant because the coupon rate is fixed.
- Duration becomes infinite as the price approaches the call price.
- Effective duration increases because the time to the final maturity remains the same.
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