Which one of the following bonds is likely to have the highest required rate of return,ceteris paribus?

Question

Quizplus · Accepted Answer

Callable bonds typically have higher required rates of return than non-callable bonds because the issuer has the option to redeem the bond before maturity, usually when interest rates decline. This option is valuable to the issuer but less favorable for the bondholder, who faces reinvestment risk. The absence of a sinking fund, which provides a degree of security to bondholders by ensuring systematic retirement of bonds prior to maturity, further increases the risk. Therefore, among the options provided, an AA-rated callable corporate bond without a sinking fund (E) would likely have the highest required rate of return due to the combined effects of credit risk (AA rating vs. AAA), callability, and the lack of a sinking fund.

Which One of the Following Bonds Is Likely to Have