Question

The textbook states that if a bondholder purchases a callable bond, the company would be able to call in bonds and replace them with lower interest rate bonds to save money on coupon payments (pp. 184). If interest fell, would it be on all bonds that are issued in the economy and would the lender be able to refuse the bond the company is choosing to replace and return the bond, while receiving the original principal they have paid for the bond?

Answer 1

The bond with a callable option is providing the company with the right to exercise the option when they want to exercise the option by paying a premium to the bondholder.

it is often exercised at a time when there is prevalent market rate lower than the interest rate which is payable on the bond, because it will cost to the company lesser by exercising the call option.

No, the lender cannot refuse, because it is a right of the company to exercise the option and the lender has got no choice but to accept the premium and return the bond to the company.