Firms that issue callable bonds have the option of repaying the principal to the bond buyers before the stated maturity date for the bonds. Firms may call their bonds before maturity in order to avoid making some of the coupon payments. Should we expect the price of a
Firms that issue callable bonds have the option of repaying the principal to the bond buyers before the stated maturity date for the bonds. Firms may call their bonds before maturity in order to avoid making some of the coupon payments. Should we expect the price of a
Chapter31: Capital Markets
Section: Chapter Questions
Problem 2E
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Question
1
![Firms that issue callable bonds have the option
of repaying the principal to the bond buyers
before the stated maturity date for the bonds.
Firms may call their bonds before maturity in
order to avoid making some of the coupon
payments. Should we expect the price of a
callable bond to be higher or lower than the
price of a noncallable bond that has the same
coupon payment, principal, and effective yield?
A.The price of the bonds should be the same.
B.The price of the callable bond should be
lower.
C. The price of the callable bond should be
higher.
D. We need to know the year in which the bond
is called in order to compare the prices.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa7247361-50a4-4ed3-b298-d53077b1072d%2Fc6a7f4ae-26b2-4637-bdf0-1486ead72486%2F8rysnsf_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Firms that issue callable bonds have the option
of repaying the principal to the bond buyers
before the stated maturity date for the bonds.
Firms may call their bonds before maturity in
order to avoid making some of the coupon
payments. Should we expect the price of a
callable bond to be higher or lower than the
price of a noncallable bond that has the same
coupon payment, principal, and effective yield?
A.The price of the bonds should be the same.
B.The price of the callable bond should be
lower.
C. The price of the callable bond should be
higher.
D. We need to know the year in which the bond
is called in order to compare the prices.
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