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Answer on Economics of Enterprise Question for LaMarcus Streeter

Question #6023
Which of the following statements is CORRECT?

a. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
b. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
c. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
d. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
e. The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same matur
Expert's answer
e. The actual life of a callable bond will always be equal to or less than the
actual life of a noncallable bond with the same mature.
A callable bond (also
called redeemable bond) is a type of bond (debt security) that allows the issuer
of the bond to retain the privilege of redeeming the bond at some point before
the bond reaches its date of maturity. In other words, on the call date(s), the
issuer has the right, but not the obligation, to buy back the bonds from the
bond holders at a defined call price. Technically speaking, the bonds are not
really bought and held by the issuer but are instead cancelled immediately.

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Comments

Assignment Expert
10.04.2014 09:03

Crystal
31.01.2013 09:22

The answer here is A. Per my Financial Management Instructor.

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