Clumsy Corp. is planning to issue new 30-year bonds. Initially, the plan was to

Question

Clumsy Corp. is planning to issue new 30-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 10 years at a 10% call premium, how would this affect their required rate of return?

There is no reason to expect a change in the required rate of return.

The required rate of return would decline because the bond would then be less risky to a bondholder.

The required rate of return would increase because the bond would then be more risky to a bondholder.

It is impossible to say without more information.

Because of the call premium, the required rate of return would decline.

There is no reason to expect a change in the required rate of return.

The required rate of return would decline because the bond would then be less risky to a bondholder.

The required rate of return would increase because the bond would then be more risky to a bondholder.

It is impossible to say without more information.

Because of the call premium, the required rate of return would decline.

Explanation / Answer

Solution-

The required rate of return would increase because the bond would then be more risky to a bondholder.

Explanation-

If the required rate of return is increase after 10 years at a 10% call premium than the bond will more risky for the bond holders.

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