Question

1. Suppose you are the finance executive at Coca-Cola in Atlanta. Coca-Cola wants to issue a 10-year bond of face value US$3Billion to finance capital expenditure but would like to recall the bond at will before the bond matures. Which of these would you recommend to your chief executive officer (CEO) about making that happen?
   1. Write a letter to the bondholders before maturity
   2. Include call provisions in the bond contract at the time of bond issue
   3. Mis-specify the maturity date in the bond contract
   4. Exclude a maturity date in the bond contract

2. Which of these is TRUE of the nominal risk-free rate and the real risk-free rate?
   1. Real risk-free rate must always include inflation premium
   2. Nominal risk-free rate includes inflation while the real risk-free rate does not
   3. Real risk-free rate excludes the product of inflation and inflation premium
   4. None of the above

Answer 1

There are two different questions asked above, I'm answering the first question.

This question is about embedded options in bonds.

Embedded Options in bonds: This type of option gives the security holders or the issuer to take some actions against one another in future, though these actions are specified during the issue of the bond. These types of embedded options materially impact the value of the security issued.

Here we are only going to discuss two types of embedded options that are relevant in terms of this question.

(i). Bonds with call provisions(callable bonds): Its a types of bond with embedded options in it which gives the issuer option to redeem bonds before it reaches to maturity at a premium. These terms are stated at the time of the issue of the bonds.

(ii). Bonds with put provisions(Puttable Bonds): This type of bond gives the bondholder with the right to redeem the bonds before its stated maturity date.

All these terms regarding the call and put is stated at the time of issue of the bonds with these embedded options.

Hence, Option (B) is correct in terms of the above question.