The following are some of the complications associated with call provisions of bonds:
I. the firm may be prevented from calling bond because of non-refunding 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 statements are true and describe some of the complications associated with call provisions of bonds. These include limitations on the firm's ability to call the bond, tax consequences for both the firm and bondholders, potential costs and delays associated with calling and reissuing debt, and other tax considerations related to replacing a low-coupon bond with a higher-coupon bond.

The Following Are Some of the Complications Associated with Call