Which of the following statements is CORRECT?
A) A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
B) Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
C) Two bonds have the same maturity and the same coupon rate.However, one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
D) The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity.Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
E) Two bonds have the same maturity and the same coupon rate.However, one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.

Question

Quizplus · Accepted Answer

Callable bonds are generally priced lower than noncallable bonds because the call feature is advantageous to the issuer, allowing them to refinance if interest rates drop. Therefore, when market interest rates are below the coupon rate, the issuer is more likely to call the bond, making the callable bond less valuable compared to when rates are above the coupon rate, where the call feature is less likely to be exercised.

Which of the Following Statements Is CORRECT