Question

Uncle Willa's Pool Supplies company issued callable bonds to raise funds for an expansion. Of the following scenarios, which one would make Uncle Willa's more likely to call its bonds?

Pick 1

Market interest rates decline sharply

Market interest rates rise sharply

Uncle Willa's financial health deteriorates significantly.

Inflation increases significantly

Answer 1

If the inflation rate increases or the interest rates rise sharply, it is not a wise decision to call back the shares as the new shares will demand a higher coupon rate. Also, if Uncle Willa's financial health deteriorates, it will be difficult to bay back for the called bond. Hence, the most feasible option is-

Market interest rates decline sharply.

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