Question

Why would a corporation or the government utilize the callable provision on your 5% bond?

a) The stock market is very strong.
b) The interest rates of similar bonds are at 5%.
c) The interest rates of similar bonds are lower than 5%.
d) The interest rates of similar bonds are higher than 5%

Answer 1

A corporation or the government may utilize the callable provision on a 5% bond when the interest rates of similar bonds are lower than 5% (c). By utilizing the callable provision, the issuer can call back or redeem the bond before its maturity date and issue new bonds with a lower interest rate, thereby reducing their borrowing costs.

Step-by-step explanation:

A corporation or the government may utilize the callable provision on a 5% bond when the interest rates of similar bonds are lower than 5% (c).

By utilizing the callable provision, the issuer can call back or redeem the bond before its maturity date and issue new bonds with a lower interest rate, thereby reducing their borrowing costs.

This is advantageous for the issuer when interest rates have decreased, as it allows them to take advantage of the lower rates and save money on interest payments.