Question

Which of the following is true? A. When all others (face value, coupon payment, maturity, and default risk) are equal, a callable bond is cheaper than a regular bond. B. Convertible bonds favor issuers while callable bonds favor buyers. C. Both A and B. D. None of above.

Answer 1

Option A is correct.

At the callable date, the issuer may recall the bonds from its investors. The issuer would recall the bonds because the debt could be refinanced at a lower interest rate.

While convertible Bonds favours the buyer because of the clause to convert the Debt into shares which makes them the owner of the company. Also callbale Bonds favours the issuer as they can called off any time before maturity.

Option A is correct. When all others (face value, coupon payment, maturity, and default risk) are equal, a callable bond is cheaper than a regular bond.

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