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      Question

      A callable bond is issued with a 10-year term but gets

      redeemed by the issuer at the end of the 6th year. Which of the following statements is most accurate?
      A Bondholders benefit from early redemption Correct Answer Incorrect Answer
      B Issuer redeems to avoid interest obligations Correct Answer Incorrect Answer
      C Bondholders receive higher interest as penalty Correct Answer Incorrect Answer
      D Callable bonds are risk-free Correct Answer Incorrect Answer
      E Callable bonds never trade at a premium Correct Answer Incorrect Answer

      Solution

      Callable bonds give the issuer the right to redeem early, usually when market interest rates fall, allowing them to refinance at lower cost. It benefits the issuer, not the bondholder.

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