medium · Debt Capital Markets pricing-yields-curve
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.
- The bond's duration stays fixed regardless of yields because its stated coupon rate never changes over the bond's life.
- Effective duration rises toward infinity as the market price converges on the call price and redemption becomes certain.
- Effective duration increases steadily because the time remaining to the bond's final stated maturity date is unchanged.
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