Which bond provision would be considered the most risky for an investor who is concerned that market interest rates will drop dramatically over the life of the bond?
A) sinking fund
B) deferred call
C) freely callable
D) non-callable
E) none of the above

Question

Quizplus · Accepted Answer

A bond that is freely callable can be called by the issuer at any time, at their discretion. If market interest rates drop dramatically, the issuer will likely call their bonds and reissue new bonds at the lower interest rate, leaving the investor with the lower rate of return than they were expecting. This makes the freely callable bond provision the most risky for an investor concerned about market interest rate drops.

Which Bond Provision Would Be Considered the Most Risky for an Investor