Which of the following statements is most correct?
A) A callable 10-year, 10 percent bond should sell at a higher price than an otherwise similar noncallable bond.
B) Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
C) Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
D) The actual life of a callable bond will be equal to or less than the actual life of a noncallable bond with the same maturity date. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
E) Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.

Question

Quizplus · Accepted Answer

When market interest rates are below the coupon rate, investors are more likely to lose the higher-yielding bond to call. Therefore, the callable bond will sell at a discount compared to the noncallable bond. As a result, the difference in prices between the two bonds will be greater.

Which of the Following Statements Is Most Correct