Answer: No, because the price of the callable bond will decrease

## Explanation The investor's conclusion is **not accurate** because the price of the callable bond will decrease with an increase in interest rate volatility. **Callable Bond Price Sensitivity:** - When interest rate volatility increases, the value of the embedded call option increases - This call option benefits the issuer, not the bondholder - Higher volatility means there's greater probability that interest rates will fall significantly, allowing the issuer to call the bond and refinance at lower rates - As the call option becomes more valuable to the issuer, the bond becomes less valuable to investors - Therefore, callable bond prices **decrease** with increased interest rate volatility **Putable Bond Price Sensitivity:** - When interest rate volatility increases, the value of the embedded put option increases - This put option benefits the bondholder - Higher volatility means there's greater probability that interest rates will rise significantly, making the put option more valuable as protection - Therefore, putable bond prices **increase** with increased interest rate volatility The investor incorrectly assumed both bonds would rise in price, but only putable bonds benefit from increased volatility.

Author: LeetQuiz Editorial Team