Question

A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following?

1) zero coupon
2) callable
3) senior
4) collateralized
5) unsecured

Answer 1

A bond that can be paid off early at the issuer's discretion is a callable bond. This feature is beneficial to issuers if interest rates drop, allowing them to reissue new bonds at lower rates.

Step-by-step explanation:

A bond that can be paid off early at the issuer's discretion is referred to as callable. When companies or governments want to raise funds, they can issue bonds to investors.

The bond represents a debt the issuer owes the bondholders, and they are obligated to pay interest, also known as coupon, and to repay the principal amount on the maturity date.

If interest rates in the market drop, the issuer might choose to pay back the bonds early if they have the callable feature, as this allows them to reissue new bonds at a lower interest rate and reduce their cost of borrowing.