Which of the following statements is CORRECT?
A) A bond is likely to be called if its coupon rate is below its YTM.
B) A bond is likely to be called if its market price is below its par value.
C) Even if a bond's YTC exceeds its YTM,an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
D) A bond is likely to be called if its market price is equal to its par value.
E) A bond is likely to be called if it sells at a discount below par.

Question

Quizplus · Accepted Answer

A bond would not be called unless the current rate was below the YTM,in which case it would sell at a premium,because only then would it be profitable to refund the bond.The investor would get the funds,then reinvest at the new low market rate.Thus,the investor would end up earning less than the YTM,even after receiving the call premium.

Which of the Following Statements Is CORRECT