Question

Which of the following statements best describes callable bonds?

1) Bonds that can be redeemed by the issuer before the maturity date
2) Bonds that can be converted into shares of the issuing company
3) Bonds that pay a fixed interest rate to the bondholder
4) Bonds that are backed by a specific asset or pool of assets

Answer 1

Callable bonds are bonds that can be redeemed by the issuer before the maturity date, providing flexibility for the issuer but posing a risk to the bondholder.

Step-by-step explanation:

Callable bonds are bonds that can be redeemed by the issuer before the maturity date. This means that the issuer has the option to pay off the bond earlier than its scheduled maturity date. Callable bonds provide flexibility for the issuer, as they can take advantage of favorable interest rate environments by refinancing the debt. On the other hand, it poses a risk to the bondholder, as the bond may be called when interest rates drop, resulting in the loss of future interest payments.