An 8 percent debenture has five years of call protection and is thereafter callable at 100 percent, except that it is nonrefundable below interest cost. Which of the following statements is correct?
A)The debenture may be called any time during the next five years.
B)The debenture may not be called during the next five years.
C)The lender has the option to demand early repayment.
D)The bond should be called when the yield on similar noncallable bonds falls to 8 percent.

Question

Quizplus · Accepted Answer

The debenture cannot be called during the next five years due to the call protection period. After that period, it can be called at 100 percent, but only if the call price is not below the interest cost, meaning the company cannot redeem the bonds at a rate lower than what it is paying in interest. The lender does not have the option to demand early repayment, as that would be a put option, which is not mentioned in the question. The bond should not necessarily be called when the yield on similar noncallable bonds falls to 8 percent, as the company may choose to continue paying the interest on the debenture if it is at a favorable rate compared to current market conditions.

An 8 Percent Debenture Has Five Years of Call Protection