Question

1(a).(TRUE or FALSE?) In August of 2011 the bond rating agency Standard and Poor’s (S&P) downgraded long-term U.S. Treasury securities from AAA to AA+.

1(b). (TRUE or FALSE?) A call provision gives the issuer the option to buy back the bonds before the scheduled maturity date.

1(c). (TRUE or FALSE?) A callable bond holder may send it back to the issuing company and convert it into a certain number of shares of that company’s profits.

Answer 1

1a. The answer is “True”. The downgrade was announced on 5^th August 2011 and was done due to the fact that the country’s debt ceiling was not raised and it had no credible plan at hand to tackle the problem of long-term debt in a systematic manner.

1b. The answer is “True”. Call provision gives issuer of a bond the right to repurchase the bonds and retire them.

1c. The answer is “False”. Callable bond can be redeemed by the issuer prior to its maturity. It is only in case of convertible bonds that an investor can convert the bonds into certain number of shares of that company.