The Call Feature Makes a Bond Riskier Because

question 112

Multiple Choice

The call feature makes a bond riskier because

• A) the issuer may not have sufficient cash to redeem the bonds at the call date.
• B) investors who ignore the call will not be paid the bond's principal.
• C) after the bond is called, the investor will need to find a new place to invest, probably at a lower rate.
• D) the issuer may decided not to call the bond and it will have to be held to maturity or sold in the secondary market.

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Definitions:

Cash Outflows

Money that exits a company, typically as a result of operational expenses, investment activities, and financing.

Opportunity Cost

Opportunity cost is the potential benefits an individual, investor, or business misses out on when choosing one alternative over another.

Target Cash Balance

A firm’s desired cash level as determined by the trade-off between carrying costs and shortage costs.

Cost of Borrowing

The total amount of money that a borrower pays to secure a loan, including interest, fees, and any other charges.