Question

Martin Company wants to issue new bonds and they are reviewing their competitor Adobe, Inc.'s bonds. If Martin company wants to issue bonds with the same terms as Adobe, but implement a call back provision, what must they do to make their bond more appealing to purchase than Adobe?

1) Increase the coupon rate
2) Decrease the maturity period
3) Increase the credit rating
4) Decrease the call price

Answer 1

To make bonds with a call back provision more appealing than those of Adobe, Inc., Martin Company should increase the coupon rate, which will offer higher returns to compensate for the additional risk to investors.

The correct answer is 1. Increase the coupon rate

Step-by-step explanation:

If Martin Company wants to issue bonds that are similar to those of its competitor, Adobe, Inc., but with an additional call back provision, the company would need to make their bonds more attractive to compensate for the added risk to investors. A call back provision allows the issuer to repurchase the bonds before the maturity date, usually at a set price, which can be unfavorable for bondholders if interest rates have fallen since the bonds were issued. To make Martin Company's bonds more enticing, they could:

Increase the coupon rate, providing a higher periodic interest payment to the investor.

Of these options, the most direct method to compensate investors for the additional risk introduced by the call back provision would be to increase the coupon rate (Option 1).