Tucker Corporation is planning to issue new 20-year bonds.Initially, the plan was to make the bonds non-callable.If the bonds were 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.
E)It is impossible to say without more information.

Question

Quizplus · Accepted Answer

If the bonds become callable, they become riskier to bondholders because the company now has the option to call them and potentially refinance at a lower rate, leaving bondholders with lower returns. As a result, bondholders will demand a higher return to compensate for this increased risk, leading to an increase in the required rate of return.

Tucker Corporation Is Planning to Issue New 20-Year Bonds