Call provisions, sinking fund, interest rate risk and reinve
Not what you're looking for?
Briefly discuss what are call provisions, sinking fund, interest rate risk and reinvestment risk. Which of these provisions make bonds more or less risky?
Support with examples from the real business case.
Purchase this Solution
Solution Summary
The solution discusses call provisions, sinking fund, interest rate risk and reinvestment risk.
Solution Preview
Call provisions:
The call provision allows the issuer to repurchase the bond at a specified call price before the maturity date. Call Features are there to protect the issuing company from interest rate risk.
If a company issues a bond with a high coupon rate when market interest rates are high, and interest rates later fall, the firm might like to retire the high-coupon debt and issue new bonds at a lower coupon rate to reduce interest payments. This is called refunding.
If the company has borrowed money in a high interest rate environment and interest rates fall, the company would like to refinance the issue just as a person would refinance his house to take advantage of the lower rates. A call provision means that the company can retire the bond before maturity date.
A call provision makes bonds more risky for the investor, since he would have to take the proceeds and ...
Purchase this Solution
Free BrainMass Quizzes
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.
Operations Management
This quiz tests a student's knowledge about Operations Management
Production and cost theory
Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.