Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?
A) Adding a call provision.
B) The rating agencies change the bond's rating from Baa to Aaa.
C) Making the bond a first mortgage bond rather than a debenture.
D) Adding a sinking fund.
E) Adding additional restrictive covenants that limit management's actions.

Question

Quizplus · Accepted Answer

Adding a call provision to a bond makes it more risky for investors because the issuer has the option to repay the bond before maturity, usually when interest rates have fallen. This means investors might not benefit from higher interest rates for as long as they expected. To compensate for this increased risk, issuers typically have to offer a higher coupon rate to issue the bond at par.

Under Normal Conditions, Which of the Following Would Be Most