The expectation in the financial marketplace of a significant decline in market interest rates should increase the differential between required rates of interest on new callable and non-callable bonds.

Question

Quizplus · Accepted Answer

When the financial marketplace expects a significant decline in market interest rates, investors demand a higher yield on callable bonds to compensate for the risk that the issuer will refinance the bond at lower rates. This increases the yield differential between callable and non-callable bonds, as non-callable bonds do not carry this risk.

The Expectation in the Financial Marketplace of a Significant Decline