Which of the following statements is most correct? A The interest rate on a new issue...
Which of the following statements is most correct?
| A | The interest rate on a new issue of callable bonds is likely to exceed that on a similar new issue of noncallable bonds. |
| B | The interest rate on a new issue of noncallable bonds is likely to exceed that on a similar new issue of callable bonds. |
| C | Noncallable bonds are riskier to the investor while callable bonds are riskier to the issuer. |
| D | There is no difference in risk to the investor between similar callable and noncallable bonds. |
| E | The interest rate on a new issue of callable bonds is likely to be equal to that on a similar new issue of noncallable bonds. |
Homework Answers
Ans:A)The interest rate on a new issue of callable bonds is likely to exceed that on a similar new issue of noncallable bonds
Reason:- In the callable bond , the issuer of bond has the right to recall bond before maturity, which is the additional risk than noncallble bond. Hence to compensate that risk normally the interest rate is higher.
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