Question

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Answer 1

Answer:

The required rate of return will increase.

Explanation:

The callable bonds are issued to insure that if market interest rate falls below the interest paid by bond then bonds can be called off and thereafter issuing another bonds at lower interest rate. Callable bonds are risky compare to non callable bond becasue investor faces problem of re -nvesting money after bonds are called off. Thus Investor expects higher rate to compansate this risk  as such by this plan required rate for the bond will increase