Answer: The optionality is appealing to bondholders because they can refinance if market interest rates increase

**Correct answer: C** A fixed-price call provision gives the **issuer** the right to redeem the bond early at a preset call price. - **A is true**: the call feature has value to the issuer, so the callable bond must trade at a discount to an otherwise identical non-callable bond. - **B is true**: callable bonds can show **negative convexity** at low yields because price appreciation becomes limited when the bond is likely to be called. - **C is false**: bondholders do **not** benefit when rates rise; they would prefer to refinance when rates **fall**, but the issuer is the one with the call option. - **D is true**: the issuer can refinance at lower rates by calling the bond and issuing new debt. So the exception is **C**.

Author: Manit Arora