Answer: lower.

## Explanation In a rising interest rate environment, the effective duration of a putable bond will be **lower** than that of an otherwise identical non-putable bond. ### Key Concepts: 1. **Effective Duration**: Measures the sensitivity of a bond's price to changes in interest rates, accounting for embedded options. 2. **Putable Bond Characteristics**: - A putable bond gives the bondholder the right to sell (put) the bond back to the issuer at a predetermined price (usually par) before maturity. - This put option provides protection to the bondholder when interest rates rise. 3. **Impact in Rising Interest Rate Environment**: - When interest rates rise, bond prices fall. - For a putable bond, as interest rates rise, the likelihood of the bondholder exercising the put option increases. - The put option effectively limits the price decline because the bondholder can put the bond back to the issuer at the predetermined price. - This makes the putable bond's price less sensitive to interest rate increases compared to a non-putable bond. 4. **Duration Relationship**: - Since effective duration measures price sensitivity to interest rate changes, and the putable bond's price is less sensitive to rising rates due to the put option protection, its effective duration will be **lower**. - The non-putable bond has no such protection, so its price will fall more sharply with rising rates, resulting in higher effective duration. ### Example: - If interest rates rise by 1%: - Non-putable bond price might fall by 8% (duration ≈ 8) - Putable bond price might only fall by 5% (duration ≈ 5) because the put option provides a floor Therefore, the correct answer is **A. lower**.

Author: LeetQuiz .