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.

    Practice Next
    More Bonds Questions

    Relevant for Exams:

    ask-question