The following are some of the complications associated with call provisions of bonds:
I.The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt.
II.The call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders.
III.There may be other tax consequences to both the firm and the bondholders from replacing a low-coupon bond with a higher-coupon bond.
IV.There are costs and delays associated with calling and reissuing debt.
A)I only
B)I and II only
C)I, II, and III only
D)I, II, III, and IV

Question

Quizplus · Accepted Answer

All four complications are associated with call provisions of bonds. Option I highlights the nonrefunding clause, which prevents firms from calling bonds, thereby leading to delay and additional costs. Option II discusses the tax implications of call premiums as a tax-deductible expense for the firm but as taxable capital gains for bondholders. Option III talks about the tax consequences of replacing low-coupon bonds with higher-coupon bonds, leading to costs and delays as well. Option IV mentions the costs and delays associated with calling and reissuing debt. Therefore, all of these points are valid concerns when it comes to call provisions of bonds.

The Following Are Some of the Complications Associated with Call