Consider a bond that gives the bondholder the option to sell the bond to the issuer...

Consider a bond that gives the bondholder the option to sell the bond to the issuer at a pre-specified price and time. This options is likely to be used (exercised) in which of the following cases?

		when the stock price decreases
		when interest rates decrease
		when interest rates increase
		when the stock price increases
		when callable bonds are sold

Expert Solution

When the interest rate will be increasing, it will mean that all the bonds which are providing the share holders with the option to sell the bonds at pre- specified price and have a putable option then, the bond holder will be exercising the option because they will want higher rate of interest and redeeming the bond at lower interest rate as it was reflecting a loss of opportunity income.

All the other options are false.

Correct answer will be option ( C) when interest rate increases

jeff jeffy answered 2 years ago

The call provision included with a bond gives A. The bondholder the right to sell the...

The call provision included with a bond gives A. The bondholder the right to sell the bond back to the issuer at par value on designated dates B. None of the above C. The issuer the right to retire the bond, fully or partially, before the scheduled maturity date D. The bondholder the right to exchange the bond for a specified number of common shares

1. A _ gives the bondholder the right, but not the obligation, to sell/exchange the _...

1. A ___ gives the bondholder the right, but not the obligation, to sell/exchange the ___ for a pre-specified number of shares of the issuing firm's stock. Call option; bond Callable bond; bond Convertible bond; bond Convertible bond; stock 2. ___ is the amount by which the call price exceeds the ___ of a callable bond. Call premium; face value Conversion price; current stock price Call premium; conversion...

The indenture between an issuer and a bondholder must be standardized. True or False

A convertible bond can be converted into common stock of the bond issuer at a price...

A convertible bond can be converted into common stock of the bond issuer at a price of $20 per share. The bond is currently selling at $800. What is the parity price of the underlying stock?

In the event of a bond default, the bondholder rights are protected under the Companies Act...

In the event of a bond default, the bondholder rights are protected under the Companies Act 1965. Discuss the above statement.

Describe a serial bond issue. Why are serial bond issues preferred by the issuer? Why are...

Describe a serial bond issue. Why are serial bond issues preferred by the issuer? Why are serial bond issues preferred by the bond holders?

Which of the following statements is FALSE? A. Coupon rate is determined by the bond issuer....

Which of the following statements is FALSE? A. Coupon rate is determined by the bond issuer. B. When YTM changes over time, coupon rate and coupon payments remain the same. C. Yield to Maturity (YTM) is set by market. D. When a bond issuer’s default probability increases, its YTM decreases.

A bondholder that owns $1,000, 10%, 10 year bond has: The right to receive dividends of...

A bondholder that owns $1,000, 10%, 10 year bond has: The right to receive dividends of 1000 per year The right to receive 10,000 at maturity Ownership rights in the issuing community The right to receive 10 per year until maturity The right to receive 1000 at maturity

Suppose you purchase a bond and right after the purchase, the issuer (the firm) is downgraded....

Suppose you purchase a bond and right after the purchase, the issuer (the firm) is downgraded. The YTM for that bond will most likely ____ A. Increase B. Decrease C. Stay the same

Callable bonds are securities that allow the issuer to repay the bond prior to its original...

Callable bonds are securities that allow the issuer to repay the bond prior to its original maturity date. 1. What circumstances warrant such a "prepayment" of the existing bond? 2. Why would the issuer wish to repay the bond prior to its original maturity date? 3. What types of "callable bonds" have you issued? 4. What are your thoughts about the benefits and detriments of callable bonds?

Question