Which of the following statements is correct?
A) All else the same, an investor will require less return to invest in a callable bond than one that is not callable.
B) All else the same, an investor will require more return to invest in a callable bond than one that is not callable.
C) The call feature does not impact the return that investors demand.
D) We would need to know the current level of interest rates to answer this question.

Question

Quizplus · Accepted Answer

Callable bonds give the issuer the right to redeem the bond before its maturity date, usually at a predetermined price. This feature is advantageous to the issuer but poses a reinvestment risk to the investor if the bond is called away in a low-interest-rate environment. Therefore, investors demand a higher yield on callable bonds to compensate for this additional risk compared to non-callable bonds.

Which of the Following Statements Is Correct