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?
a. Because of the call premium, the required rate of return would decline.
b. There is no reason to expect a change in the required rate of return.
c. The required rate of return would decline because the bond would then be less risky to a bondholder.
d. The required rate of return would increase because the bond would then be more risky to a bondholder.

Answer 1

Answer

d. The required rate of return would increase because the bond would then be more risky to a bondholder.

Explanation

The risk–return spectrum (also called the risk–return tradeoff or risk–reward) is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment.