Final answer:
A callable bond gives the issuer the right to repay the bond before maturity. The issuer uses this option to save on interest costs if market rates decline. The correct answer to the student's question is C. issuer.
Step-by-step explanation:
A callable bond is a type of financial contract in which the issuer of the bond, who can be an entity like a corporation, a municipal government, or the federal government, has the right to repay the borrowed amount before the bond reaches its maturity date. This feature allows the issuer to take advantage of declining interest rates by refinancing the debt at a lower cost. The correct answer to the question of whom the callable bond gives the option of early retirement to is C. issuer.
Bonds are debt securities under which the issuer owes the holders a debt and is obligated to pay them interest (the coupon) and to repay the principal at a later date, known as the maturity date. When the market interest rates drop below the coupon rate of the bond, the bond becomes more attractive to investors, leading to a price increase. In such situations, the issuer may choose to call the bond and reissue debt at a lower interest rate.