Question

Bond issuers will call bonds when it is favorable for them to do so. The benefit...

Bond issuers will call bonds when it is favorable for them to do so. The benefit the issuer receives is a cost to the bondholders. Explain some of the ways in which bondholders are protected from calls.

Homework Answers

Answer #1

Ways to protect bond holders from calls:

  • Call protection period: during a call protection period, bonds cannot be called. The investor will continue to receive the coupon rate of interest. This protects the bondholder from losing a relatively high rate of fixed income until the call protection period ends. After the call protection dates, the ends can be redeemed at any time. The feature of call protection can be extremely beneficial to bond holders in the times of falling interest rates.
  • Call premium: In case the bond holders redeem the bonds before its maturity date, in such a case the issuers have to pay a premium, that is a price is paid for the security which is above the issue price. In case, the issuers call the bonds during the call protection period the issuer has to pay a call premium as a penalty to the bond holders.
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
2a)US Treasury Bonds are quoted according to Select one: A. its yield to maturity. B. its...
2a)US Treasury Bonds are quoted according to Select one: A. its yield to maturity. B. its yield to call. C. discount yield. D. a percentage of dollar price. b) Which of the following is not an example of an embedded option? Select one: A. Sinking fund provision B. Warrant C. Call provision D. Conversion provision c)The Put premium on a Putable Bond is Select one: A. the amount an issuer must pay above par value when putting (or selling) its...
Bond Valuation: Netflix is issuing a new series of coupon bonds. The bonds will mature in...
Bond Valuation: Netflix is issuing a new series of coupon bonds. The bonds will mature in 10 years, have a $1,000 face value, have a 6.5% coupon rate (paid annually). Netflix’s credit rating is B (Yield rate - 8.9%). a. How much can Netflix expect to sell each bond for? b. Suppose that, in exactly one year (so immediately after the bond pays its first coupon), Netflix experiences a credit rating upgrade from B (8.9%) to B+ (8%). What would...
1. When a corporation buys back its own stock the stock is then called: a.Bond stock...
1. When a corporation buys back its own stock the stock is then called: a.Bond stock b. Treasury stock c.Preferred stock 2. Which type of business would have a Retained Earnings account in the Shareholder’s Equity section? a.Sole proprietorship b. Partnership c.Corporation 3. The interest tax shield allows a corporation to deduct interest expense from its Earnings Before Interest and Tax before the tax amount is calculated on Earnings Before Tax, giving the corporation a tax deduction for its interest...
1. AAA, Inc. currently has an issue of bonds outstanding that will mature in 31 years....
1. AAA, Inc. currently has an issue of bonds outstanding that will mature in 31 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 20.0% with annual coupon payments. The bond is currently selling for $890. The bonds may be called in 4 years for 120.0% of the par value ($1200). What is your expected quoted annual rate of return if you buy the bonds and hold them until maturity? 2. BBB, Inc....
Decisions involving capital expenditures often require managers to weigh the costs and benefits of different options...
Decisions involving capital expenditures often require managers to weigh the costs and benefits of different options related to the financing of a project. For instance, deciding when to call a bond before maturity due to changing interest rates can lower the overall cost of a project significantly through refinancing. So, it is important to be able to understand the real interest rate being paid out to your bondholders (yield) at any given time. You will utilize the information in this...
Which bond should have the highest interest rate? A. Low quality bonds B. Medium quality bonds...
Which bond should have the highest interest rate? A. Low quality bonds B. Medium quality bonds C. High quality bonds Which of the following statements is NOT true? A. Stock owners benefit from stock price increases B. Common stocks are not securities C. Stock prices tend to be very volatile D. Higher stock prices allow companies access to more capital What is the expected impact of a decline in the money supply to the US economy? A. Lower aggregate prices...
9. If a corporation declares dividends, preferred stockholders must receive them before: a.Bondholders are paid interest...
9. If a corporation declares dividends, preferred stockholders must receive them before: a.Bondholders are paid interest b. The government is paid taxes c.Common stockholders are paid dividends 10. An example of an annuity is which of the following: a.Receiving a commission payment that changes each pay period b. Receiving the same interest payment on a bond each year for ten years c.Receiving a one-time-only payment from selling a truck 11. A measure of the cost of raising equity capital from...
Chapter 6 13. Consider the following bonds: Bond Coupon Rate (annual payments) Maturity (years) A 0%...
Chapter 6 13. Consider the following bonds: Bond Coupon Rate (annual payments) Maturity (years) A 0% 15 B 0% 10 C 4% 15 D 8% 10 What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%? Which of the bonds A–D is most sensitive to a 1% drop in interest rates from 6% to 5% and why? Which bond is least sensitive? Provide an intuitive explanation for your answer....
What problems arise when a species is introduced from a foreign ecosystem? How do these problems...
What problems arise when a species is introduced from a foreign ecosystem? How do these problems occur? Give four categories of consumers in an ecosystem and the role that each plays. Compare “instrumental” and “intrinsic” value as they relate to determining the worth of natural species. How does Leopold’s idea of the land ethic fit into these two categories? What is the “tragedy of the commons”? Give an example of a common-pool resource, and describe ways of protecting such resources....
Which of the following statements is NOT CORRECT? a. When new stock is issued, the company...
Which of the following statements is NOT CORRECT? a. When new stock is issued, the company pays an investment bank to handle the expenses and fees involved with selling the stock. These expenses are called flotation costs. b. Flotation costs reduce the amount of capital the firm receives from a new stock issue. The company must make each dollar of the new issue work harder, so new investors earn their required rate of return. The new stock has a higher...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT