Answer: a putable bond only.

## Explanation An increase in interest rate volatility increases the value of a putable bond only. Here's why: **Putable Bond:** - A putable bond gives the bondholder the right to sell (put) the bond back to the issuer at a predetermined price - When interest rate volatility increases, the value of the put option increases because there's a higher probability that interest rates will rise significantly, making the bondholder want to exercise the put option to reinvest at higher rates - This embedded put option provides downside protection, making the bond more valuable **Callable Bond:** - A callable bond gives the issuer the right to call (redeem) the bond before maturity - When interest rate volatility increases, the value of the call option increases, but this benefits the issuer, not the bondholder - Higher volatility means there's a higher probability that interest rates will fall significantly, allowing the issuer to call the bond and refinance at lower rates - This makes the callable bond less valuable to investors Therefore, only the putable bond benefits from increased interest rate volatility.

Author: LeetQuiz Editorial Team