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SIE practice questionmediumCallable Bonds

Which statement about callable bonds is TRUE?

  1. AAll corporate bonds are callable
  2. BCallable bonds benefit the bondholder because they can redeem early
  3. CCallable bonds typically offer a higher coupon rate than comparable non-callable bonds to compensate investors for call risk✓ Correct answer
  4. DCallable bonds can only be called at par value
Explanation

Why C — Callable bonds typically offer a higher coupon rate than comparable non-callable bonds to compensate investors for call risk

Callable bonds offer higher coupon rates to compensate investors for the risk that the issuer may redeem the bond before maturity, typically when rates fall. The call feature benefits the ISSUER, not the bondholder (A is wrong). Bonds are often called at a slight premium to par, not necessarily at par (C). Not all corporate bonds are callable (D).

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