2.10.3 Callable Bonds

Question 1

What is a callable bond?

Answer 1

The bond which can be redeemed by the issuer prior to the stated maturity date

Question 2

To compensate investors for the _______risk and to mitigate _____ callable bonds come with _____yields than non-callable bonds

Answer 2

increased, possible losses, higher

Question 3

Some callable bonds provide a call premium to lessen the risk of a call. Briefly explain.

Answer 3

When issuer offers $1100 call price for a bond with par value of $1000 it is called, call premium. This is offered by the issuer to make the offer inviting incase he decides to redeem it prior to the maturity date.

Question 4

The trust indenture of a callable bond will include a _____ which includes both the call date and the call price.

Answer 4

call provision

Question 5

What is a call provision?

Answer 5

It sometimes requires an issuer to pay premium for an early redemption of the bond. The premiums become lower as the bond approaches its maturity date

Question 6

Another safeguard is call protection, which prohibits redemption during the _____of the bond’s life.

Answer 6

first few years

Question 7

The earliest date on which a bond is callable is known as the ____

Answer 7

first call date

Question 8

What is sinking fund redemption?

Answer 8

1) It requires the issuer to set aside periodic payments aimed at reducing its debt.
2) Funds are set aside in an escrow account at intervals set in the indenture to assist in retirement of all or some of the issuer’s long-term debt prior to maturity.
3) The funds need to be invested in a safe and liquid investment

Question 9

A sinking fund redemption offers some protection to the investor by _______?

Answer 9

lowering the risk of default

Question 10

Bonds with sinking fund provisions are redeemed at ____value rather than at a _____.

Answer 10

par, premium

Question 11

____________ are more likely to use a sinking fund to increase the ____ marketability.

Answer 11

Lower rated issuers, bond’s