Question

Investors are willing to purchase bonds with a call feature only if the bonds offer a

Select one:

a. slightly higher interest rate than similar bonds without a call feature.

b. sinking fund provision.

c. slightly lower return than similar bonds without a call feature.

d. slightly higher number of shares of the issuer's stock.

Answer 1

Option (a) is correct

Investors are willing to purchase bonds with a call feature only if the bonds offer a slightly higher interest rate than similar bonds without a call feature. In the bonds with a call feature, bond issuer company can call back or repay the bonds before maturity to save on the interest cost. To compensate the investors for this callable feature, the bond issuer company offers or gives the investor slightly higher rate than similar bonds without a call feature.