Question

All else equal, which of the following types of “special feature” bonds would likely carry a lower coupon rate than would the same bonds if issued without the “special feature”?

A. Callable

B. Convertible

C. Redeemable (put option)

D. Both B and C

E. A, B, and C

Answer 1

Callable bonds helps the company to call the bonds early if interest rate goes down, in this case higher coupon rate is paid than normal, as company have beneficial option

Convertible bonds: under convertible bond the bond holder can convert the bonds in to stock of the company as pre determined ratio. This is beneficial option for bond holder, so the coupon rate is lower than normal

Redeemable bonds: under this option bond holder can redeem the bonds early than maturity.

Here if interest rates in market goes higher bond holder can redeem this bonds before maturity.

This is beneficial for bond holder so coupon rate is lower than normal bonds

Hence option B & C has lower coupon rate than normal bonds

Option D is correct answer