A firm raising capital by issuing callable bonds instead of non-callable bonds will either have to pay a higher coupon rate or accept lower proceeds.

Question

Quizplus · Accepted Answer

If a firm issues callable bonds, investors are exposed to the risk that the bonds will be called before maturity, which can result in a loss of interest income and principal. To compensate investors for this risk, the firm will typically have to offer a higher coupon rate on callable bonds compared to non-callable bonds. Alternatively, if the firm wants to maintain the same coupon rate as it would offer on non-callable bonds, it may have to accept lower proceeds due to the higher risk and uncertainty associated with callable bonds.

A Firm Raising Capital by Issuing Callable Bonds Instead of Non-Callable