Ranger Inc.would like to issue new 20-year bonds.Initially, the plan was to make the bonds non-callable.If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Question

Quizplus · Accepted Answer

Making the bonds callable after 5 years with a call premium increases the risk to bondholders, as it introduces the possibility of early redemption resulting in reinvestment risk. As a result, investors would demand a higher required rate of return to compensate for the increased risk, leading to an increase in the required rate of return.