Explanation:

• Option A (Putable bond): Incorrect. When interest rates are low relative to the bond's coupon rate, the value of the put option is minimal. The price impact of benchmark yield changes on a putable bond is similar to that of a non-putable bond, meaning price appreciation is not significantly limited. Additionally, a rational investor would not exercise the put option when market rates are below the coupon rate.

• Option B (Callable bond): Correct. The effective duration of a callable bond is lower than that of a comparable non-callable bond because the callable bond's price does not rise as much when benchmark yields decline. The embedded call option restricts price appreciation, particularly when interest rates fall and the likelihood of the bond being called increases.

• Option C (Option-free bond): Incorrect. An option-free bond serves as the base case for comparison. Bonds with embedded options (like call or put features) exhibit reduced price sensitivity to benchmark yield changes, assuming no change in credit risk. For callable bonds, price appreciation is limited when market rates drop below the coupon rate, while for putable bonds, price depreciation is limited when rates rise above the coupon rate.