The call policy that maximizes shareholder wealth is to call a bond issue when:
A) The bond's price is above par
B) The bond's price is above par, but below the call price
C) The bond's price exceeds the call premium
D) The bond's price equals or exceeds the call price

Question

Quizplus · Accepted Answer

The call policy that maximizes shareholder wealth is to call a bond issue when the bond's price equals or exceeds the call price, as this would result in the lowest cost to retire the debt. If the bond's price is below the call price, it would not make sense to call the bonds as the company could simply repurchase them in the market at a lower cost. If the bond's price is above par but below the call price, the company would have to pay a call premium, increasing the cost of retiring the debt. Therefore, calling the bond when the price equals or exceeds the call price is the best choice.

The Call Policy That Maximizes Shareholder Wealth Is to Call