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

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

Bonds will be usually called back when the new interest rates are lower, this will lower the interest income of the investors. call premium cannot always compensate all the income loss by investors.

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