Which bond provision would be considered the riskiest for an investor who is concerned that market interest rates will drop dramatically over the life of the bond?
A) sinking fund
B) deferred call
C) freely callable
D) non-callable
E) None of these are correct.

Question

Quizplus · Accepted Answer

A freely callable bond allows the issuer to call the bond at any time, which means they can refinance the debt if interest rates drop without incurring any penalties. This is risky for the investor since it reduces the value of their bond if they were expecting to receive interest payments for a longer period of time, and they also may not be able to reinvest the funds at the same rate they were originally receiving. Therefore, a freely callable bond is the riskiest provision for an investor concerned about a drop in market interest rates.

Which Bond Provision Would Be Considered the Riskiest for an Investor