Lei Lee makes the following statement about putable bonds: As yields rise, the price of

Bond B is currently trading at 1,015 with an effective duration of 6.88. If the market interest rate fell by 25 basis points, the new price would beclosest to:

A. $998

B. $1,015

C. $1,032

Changes in a bond’s cash flows associated with yield changes would be reflected in the bond’s:

A. modified duration

B. Macaulay duration

C. effective duration

Jim King makes the following statement about callable bonds: As yields rise, the callable bond behaves much the same as a comparable option-free bond. Kate King adds that as yields fall, the price of callable bonds will rise less quickly than comparable option-free bonds (beyond a critical point). Are their statements about callable bonds correct?

A. Neither statement is correct.

B. Both statements are correct.

C. Only one of the statements is correct.

David Zhao, a fixed-income analyst, determines that a 6.8% coupon option-free bond, with 7 years to maturity, would fall 2.5% in price if market interest rate rise by 0.5%. If market interest rates fall by 50 basis points, the bond’s price would climb by:

A. less than 2.5%

B. exactly 2.5%

C. more than 2.5%