Callable bonds

[archived_user]

Hello,
Can anyone help me understand why the price of the callable bond is capped by the price of the call option if it is near the exercise date.
Thank you!

 

[archived_user]

It’s not capped by the price of the call option; it’s capped by the call price (i.e., the price at which it can be called).
Would you pay $1,040 for a bond that could be called away from you at any moment for $1,020?

 

[archived_user]

ok, so duuump!! i misunderstood the sentence, i thought it was the call premium. thank you