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Difficulty: EasyDebt Securities and Bond Structure

A corporation issues bonds with a contractual feature allowing the firm to redeem the securities prior to their stated maturity date, usually when prevailing interest rates drop. Which of the following bond features describes this provision?

  1. Call provisionAnswer
  2. B
    Put provision
  3. C
    Conversion feature
  4. D
    Inverted yield feature

Answer

Call provision
A call provision grants the issuing corporation the contractual right to redeem outstanding bonds prior to their specified maturity date. Issuers typically execute call options when market interest rates decline so they can replace higher-interest debt with new securities at lower rates.

Step-by-Step Solution

1
Identify the party initiating the redemption and the condition described.
The issuer seeks the option to pay off debt early, typically to refinance at lower current interest rates.
Different covenant features grant specific rights to either the issuer or the bondholder.
2
Match the contractual right with the standard bond terminology.
The call provision allows the issuer to call back the bond before maturity.
By definition, a call feature benefits the issuer by enabling debt retirement when interest rates fall.

Key Concept

Bond Call Provisions
Estimated Time:45s
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Topics

Debt Securities and Bond Structure

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