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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.
A call provision outlines the date and amount at which a bond issuer can call bonds it has issued.
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True. A call provision specifies when and at what price a bond issuer can redeem its bonds.
3.
The yield-to-call is a bond's _______.
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Rate of return. The yield-to-call takes into account the purchase price, redemption price, interest payments, and call date.
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.
Bond callability directly enables a company to _______.
Choose wisely. There is only one correct answer.
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.