Question

An investor owns a 6% bond issued by ABC Corporation that is callable at 102 ($1,020) next May 1. All of the following statements are true regarding the call EXCEPT
A) up until May 1, the investor has call protection
B) it is likely that once the bond is called, the investor will also be exposed to reinvestment risk
C) when bonds are called, they are usually called at a premium to par
D) the bond is probably being called by the issuer because interest rates went up

Answer 1

Answer:D) the bond is probably being called by the issuer because interest rates went up

This statement is not true because when interest rates go up the issuer is at an advantage as he had previously borrowed money at a interest rate which is lower than the present interest rate, as interest rates have risen. Also when interest rates rise and the issuer calls the bond he will have to pay higher interest to re borrow money and this is foolish thus the issuer will not call the bond when interest rates rise. The issuer will call the bond when interest rates fall, as the issuer can re issue the bonds and borrow money at lower interest rates.

Explanation: