Which of the following statements about call provision of bonds is TRUE?Question 8Select one:a.It is normally exercised when the market interest rate increases.b.Bond with call provision usually offers a higher coupon rate for the bond investor.c.It allows bond investor to request for early repayment of the principal.d.It is equivalent to an option which lengthens the maturity period of the bond.
Question
Which of the following statements about call provision of bonds is TRUE?Question 8Select one:a.It is normally exercised when the market interest rate increases.b.Bond with call provision usually offers a higher coupon rate for the bond investor.c.It allows bond investor to request for early repayment of the principal.d.It is equivalent to an option which lengthens the maturity period of the bond.
Solution
The correct answer is b. Bond with call provision usually offers a higher coupon rate for the bond investor.
Here's why:
a. It is normally exercised when the market interest rate increases - This is FALSE. A call provision is typically exercised when the market interest rate decreases, not increases. This is because when interest rates decrease, the issuer can call back the bond and reissue it at a lower rate.
b. Bond with call provision usually offers a higher coupon rate for the bond investor - This is TRUE. Because call provisions add an element of risk for the investor (the risk
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