Question

4. Which of the following statements is CORRECT about repayment provisions of bonds?

A) The issuer of a callable bond will exercise the call option when the market interest rate exceeds the coupon rate of the bond.

B) A convertible bond generally pays a higher coupon rate than an identical non-convertible bond.

C) Bonds with a sinking funds provision can be paid back later than their maturity date.

D) Holders of a convertible bond should exercise the conversion option when the market share price exceeds the conversion price.

Answer 1

Callable bond issuer will only call whent the interest rate in the market are lower than the interest rate of the issued bond because this is a method to refinance the debt at a lower interest rate so that the interest cost reduces. Therefore statement A is false

Convertible bond gives the option to the bondholder to convert it into a given numebr of shares and the bondholder can exercise the same when he wishes to after the conditions mentioned for such conversion is met. So the bondholder will convert only when it is beneficial and he expects that the growth potential in the market is higher so his expected return can increase. As the conversion option benefits the bondholder, the interest rate on the same is lower than that of the non convertible bond. So statement B is flase

Sinking fund is a method in which the corporation sets aside money in a fund which is used to buy bonds from the market or pay back the debt at the time of maturity. So it cant go beyond the maturity date and therefore statement C is flase

When the market price is higher than the conversion price, the bond holder can convert at the conversion price and immediately sell in the market at the higher price and profit so statement D is true