Call Features of Bonds

Which of the following statements concerning the call feature of a bond is not correct?

If it is freely callable, the issuer may retire the bond at any time.
If it is noncallable, the issuer may retire the bond prematurely by repurchasing it.
If the bond carries a deferred call, the issuer may not retire the bond before a specified date.
Call features are actively sought by investors, since investors usually receive a premium when bonds are called.

D is the answer. Investors do not want their bonds to be called--they want to lock in the high current rate of interest. The premium may not compensate investors for the interest rate risk to which they are exposed if the market rates of interest decline, the bonds are called for redemption, and the investors must reinvest the proceeds of the redemption at the low market rates of interest.

Posted in CFP® Practice Question

About Dan Madden, CFP®

View all posts by Dan Madden, CFP® →