I just ran into a question on a schweser practice test (exam 2 afternoon q29) where the basis of the correct answer is that scarce callable bonds will trade at a premium - they don’t define to what it will trade at a premium to and I assumed it meant equivalent non callable bond. Surely, under my assumption a callable would never trade at a premium to an otherwise equivalent non-callable, right? If this is true what should I assume that they are referring to if I see a vaguely worded question like this going forward?
At a premium to their normal price if they weren’t scarce. Not at a premium to an otherwise equivalent noncallable bond.