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    Question

    A company issues a 10-year callable bond with a 9%

    coupon. After 5 years, market interest rates fall to 6%. What is the most likely action the issuer will take, and why?
    A Do nothing; continue paying 9% Correct Answer Incorrect Answer
    B Call the bond early and refinance at lower rates Correct Answer Incorrect Answer
    C Increase the coupon to match new market rates Correct Answer Incorrect Answer
    D Convert the bond into equity Correct Answer Incorrect Answer

    Solution

    A callable bond gives the issuer the right to repay early. If interest rates fall, the issuer can call the bond and issue new bonds at lower rates, reducing interest costs.

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