A firm plans to sell $100 million of 20-year bonds to raise capital for expansion.Which of the following provisions,if it were included in the bond's indenture,would tend to raise the coupon interest rate over what it would be if the provision were not included?
A) A call provision under which the firm may call the bonds for redemption after 5 years.
B) Provision for a sinking fund,where a set percentage of the bonds must be called for redemption at par each year.
C) A restrictive covenant which states that the firm's current ratio must always exceed 2.0.
D) A pledge of real property as security for the bonds.
E) A provision under which the bondholders may,at their option,turn the bond in to the company and receive the bond's face value;that is,the bond is redeemable at par at the holder's option.

Question

Quizplus · Accepted Answer

A call provision allows the issuer to redeem the bonds before maturity, which increases risk for bondholders as they may have to reinvest at lower rates. This risk typically results in a higher coupon rate to compensate bondholders.

A Firm Plans to Sell $100 Million of 20-Year Bonds