Matthew Recently Invested in 15-Year Bathtub Brewing Company Bonds Paying

question 17

Multiple Choice

Matthew recently invested in 15-year Bathtub Brewing Company bonds paying 8% interest annually, with a maturity date of 2035. The bonds are callable in 2030. If interest rates go down to 5.5% in the year 2030, the brewery is likely to

• A) not exercise the call.
• B) exercise the call.
• C) give bondholders a choice of whether they want to turn the bonds back to the brewery.
• D) decrease the interest rate that they are willing to pay the holder.

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Definitions:

Weekly Cash Flows

The movement of cash in and out of a business on a weekly basis, tracking how money is spent and received.

Opportunity Cost

The expense incurred by not choosing the second-best option while deciding.

Monthly Cash Flows

The total amount of money being transferred into and out of a business, particularly during a month.

Lockbox System

A system used by companies to expedite the collection of check payments by having them processed through a bank's PO Box.