Question

the following statements is FALSE? Question 48 options: When yields have risen, the issuer will not choose to exercise the call on the callable bond. The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond. A callable bond is relatively less attractive to the bondholder than the identical non-callable bond. The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate she is currently receiving.

Answer 1

Answer:

 The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond.

Explanation:

In simple words, callable bonds refers to the bonds with a special embedded option. In such bonds, the issuer have the right to buy back these bonds at a predetermined price after a certain lockout period.

Obviously such bonds are less attractive for bondholders as the issue will only buy back these bonds when the rates in the market are low and bonds can be purchased at a lower value .