Series 7 practice questioneasyDebt Securities — Corporate Bonds — Callable
An issuer is MOST likely to call its outstanding bonds when:
- AInterest rates have risen significantly
- BThe company is facing bankruptcy
- CThe company's credit rating has been downgraded
- DInterest rates have fallen significantly✓ Correct answer
Explanation
Why D — Interest rates have fallen significantly
Issuers call bonds when interest rates have fallen because they can refinance the debt at a lower rate, reducing their interest expense. This is similar to a homeowner refinancing a mortgage at a lower rate. The call feature benefits the issuer, not the bondholder, because the bondholder must reinvest at the new, lower prevailing rates.
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