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Bonds 202: Callable Bonds

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1.
Under callability, an investor often must replace a bond earning a low rate of interest with another bond paying a higher rate of interest.
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False. An investor often must replace a bond earning a high rate of interest with another bond paying a lower rate of interest.
2.
Bond callability directly enables a company to _______.
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Refinance debt at a lower interest rate. The primary reason that companies issue callable bonds is to protect themselves in the event that interest rates drop.
3.
A company that cannot call its bonds before maturity may be at a competitive disadvantage.
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True. A company that cannot refinance its debts at lower interest rates faces a disadvantage in the marketplace.
4.
Joanne is contemplating buying a callable bond. She will want to make a special point to check _______.
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The call date. Joanne can't be sure of receiving interest income after that date.
5.
Todd just bought a bond with a call date of eight years in the future. His bond therefore offers _______.
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Call protection. Many bond investors like to look for bonds that offer call protection.