Section A (1 Mark)
Why is the price/yield profile of a callable bond less convex than that of an otherwise identical option-free bond? The price:
Increase is capped from above, at or near the call price as the required yield decreases.
Increase is capped from above, at or near the call price as the required yield increases.
Decrease is limited from below, at or near the call price as the required yield increases.
None of the Above
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