1 Firms that issue callable bonds have the optionof repaying the principal to the bond buyersbefore the stated maturity date for the bonds.Firms may call their bonds before maturity inorder to avoid making some of the couponpayments. Should we expect the price of acallable bond to be higher or lower than theprice of a noncallable bond that has the samecoupon payment, principal, and effective yield?A.The price of the bonds should be the same.B.The price of the callable bond should belower.C. The price of the callable bond should behigher.D. We need to know the year in which the bondis called in order to compare the prices.

A non callable bond will sell at face value whose price will not change if coupon rate remains same…

Firms that issue callable bonds have the option of repaying the principal to the bond buyers before the stated maturity date for the bonds. Firms may call their bonds before maturity in order to avoid making some of the coupon payments. Should we expect the price of a

Firms that issue callable bonds have the option of repaying the principal to the bond buyers before the stated maturity date for the bonds. Firms may call their bonds before maturity in order to avoid making some of the coupon payments. Should we expect the price of a

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter31: Capital Markets

Section: Chapter Questions

Problem 2E

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Question

Firms that issue callable bonds have the option
of repaying the principal to the bond buyers
before the stated maturity date for the bonds.
Firms may call their bonds before maturity in
order to avoid making some of the coupon
payments. Should we expect the price of a
callable bond to be higher or lower than the
price of a noncallable bond that has the same
coupon payment, principal, and effective yield?
A.The price of the bonds should be the same.
B.The price of the callable bond should be
lower.
C. The price of the callable bond should be
higher.
D. We need to know the year in which the bond
is called in order to compare the prices.

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