An 8% debenture has 5 years of call protection and is thereafter callable at 100%, except that it is non-refundable below interest cost. Which of the following statements is correct?
A) The debenture may be called any time during the next 5 years
B) The debenture may not be called during the next 5 years
C) The lender has the option to demand early repayment
D) The bond should be called when the yield on similar non-callable bonds falls to 8%

Question

Quizplus · Accepted Answer

The debenture has 5 years of call protection, which means it cannot be called during this period. After the 5-year call protection, the debenture can be called at 100%, but it is non-refundable below interest cost, which means the issuer cannot use this provision to force holders to accept less than the stated interest rate. Therefore, answer B is correct. Answers A, C, and D are incorrect because they are inconsistent with the call protection provision of the debenture.

An 8% Debenture Has 5 Years of Call Protection and Is