Which is a situation that the borrower will not exercise the call options of debt? The...
Which is a situation that the borrower will not exercise the call options of debt?
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The credit rating of the borrower has improved since the time of issuance (assuming treasury yield is the same). |
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The market mortgage rate increases after a household gets a mortgage. |
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A new bank enters the market and offers mortgage rates below the current mortgage rates of a household |
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Treasury yield has declined after a corporate has issued a callable bond (assuming credit rating is the same) |
Homework Answers
Correct answer - b. The market mortgage rate increases after a household gets mortgage.
Typically, call options on bonds are exercised by the issuer when interest rates have fallen. The reason for this is that the issuer can simply issue new debt at a lower rate of interest, effectively reducing the overall cost of the borrowing, instead of continuing to pay the higher effective rate on the borrowing.
Hence, when market mortgage rate increases after a household gets a mortgage, a borrower will not exercise the call options of debt.
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Which is a situation that the borrower will not exercise the
call options of debt?
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