Explain to King Solomon what call provisions and sinking fund provisions are and how these provisions are expected to affect the risk of the bond
Explain to King Solomon what call provisions and sinking fund provisions are and how these provisions are expected to affect the risk of the bond
Call Provision:
A contingent provision included in a bond indenture. It leads a bond issuer to a right to call the bond back when there is a fall in the interest rates. Because of the early retirement risk an investor faces. Interest rate risk faced by an investor when the fall in interest rates will not provide any benefit to an investor to a limit as the bond is callable.
So, the call option provides the right to call bonds back as it indicates an entity might have to make payment to the bondholders the amount more than that of a call value if called. Hence, they are riskier.
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