Answer to Question #131469 in Financial Math for bonolo

Question

Which of these five statement is the most correct:
a. Other things held constant, a callable bond would have a lower required rate of
return than a noncallable bond.
b. Other things held constant, a corporation would rather issue noncallable bonds than
callable bonds.
c. Reinvestment rate risk is worse from a typical investor's standpoint than interest
rate risk.
d. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave
investors a 10 percent rate of return, and if interest rates then dropped to the point
where rd = YTM = 5%, we could be sure that the bond would sell at a premium over
its R1 000 par value.

Answer 1

а.this statement is incorrect, since the Issuer remains in the advantage by preserving its capital investment, by early repayment and withdrawal from circulation on the market of "not promising" securities for it. But at the same time, issuing fresh-baked revocable bonds at a new, current price, with an appropriate rate on coupon income, and at the same time, paying the investor, the holder slightly inflated interest.

The investor, in turn, is also not left "with a nose". Due to the interruption of his promising financial situation, with the presence of suddenly rising in the price of bonds, he receives compensation in the form of a "premium" on a slightly inflated percentage of the coupon income of bonds that no longer belong to him.

b.

this statement is incorrect , since a sudden and not even expected reduction in interest rates in the country, the Issuer is much more profitable to buy all the revocable bonds from investors, and reissue new ones with the current face value and the corresponding coupon rate.

с.this statement is incorrect , since reinvestment is getting additional income without significant labor costs. this process involves making profitable investments in financial instruments repeatedly or in addition to an existing investment portfolio. The objects of reinvestment may be different each time

d.

since the interest rate will fall, the Issuer will have to sell the bonds at a premium to get the necessary funds. this statement is true