Question

If bonds payable are not callable, the issuing corporation

Answer 1

Answer:

A. Can repurchase them in the open market

Explanation:

Non-Callable Bonds

These are bonds that are only paid out at maturity meaning the issuer of the bond cannot call the bond until its maturity date. Another way of explaining it is that a non callable bond is a financial security that cannot be redeemed by the issuer earlier than specified as maturity date if not the issue will pay a penalty. A non-callable bond has a locked interest rate payable to the investor until its maturity.

A common non-callable bond is the US Treasury Stock. The challenge is that even if interest rates declines, the rate is locked in such that the issue will continue to pay that higher rate until maturity.

The implication is that if interest rates should decline, the investor continues to receive the fixed interest rate higher than current interest rate and the issuer is obliged to continue to pay the agreed interest rate until maturity. Apparently, non-callable bonds tend to favour the investor over the issuer

Solution to Non-callable Bonds

The only solution is for the issuer to  repurchase the bonds on the open market at prevailing rates and then decide to re-issue them at prevalent interest rates which may be lower than the non-callable rate or re-issue them as callable bonds. This way there will be no penalty to pay and the issuer will not need to wait until the bond's maturity.