Analysis of Bond Call Features

Very Hard Fixed Income Securities Bond Features

Consider a bond issued by a corporation with the following features: it has a face value of $1,000, a coupon rate of 5% payable semi-annually, and a maturiity in 10 years. The bond includes a call provision that allows the issuer to redeem it at $1,050 after 5 years, and it is currently trading at $950 in the market. If interest rates rise by 1% after 4 years, evaluate how the bond's features influence its valuation and the potential actions the issuer may take concerning the call provision.

The issuer is likely to call the bond if interest rates rise because they can refinance at a lower rate.

The bond is likely to be called since the current market price is below its call price.

The issuer is unlikely to call the bond because they would pay a premium over the market price.

Hint

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