Which of the following conditions will typically be present when a firm calls a bond prior to maturity?
A) The firm is in poor financial health.
B) Interest rates have risen substantially since the bond was issued.
C) Interest rates have fallen substantially since the bond was issued.
D) The call option is ready to expire.

Question

Quizplus · Accepted Answer

When interest rates have fallen substantially since the bond was issued, it becomes beneficial for the firm to call the bond prior to maturity and issue new bonds at a lower interest rate. This is known as a refunding call. Option A is incorrect since calling a bond prior to maturity is not a sign of poor financial health. Option B is incorrect because if interest rates have risen, the firm would most likely not want to call the bond and issue new bonds at a higher interest rate. Option D is incorrect because the call option can typically be exercised until the bond's maturity date.

Which of the Following Conditions Will Typically Be Present When