Question

A company issues the following bonds on June 1, 2002. Series A (counts as two) Series B $50 million BBB June 1, 2030 June 1, 2008 100 Par Value Rating Maturity Call date Call price $50 million BBB June 1, 2030 Non-callable -- If both bonds have the same market liquidity, the yield-to-maturity on the Series A bond should be [ ] than yield-to-maturity on Series B bond. a) higher b) lower c) the same d) either higher or lower(depending notherfactors)

Answer 1

Answer: a. Higher

Explanation:

Series A is a callable bond which means that the company will be able to buy it back after a certain period of time at a price dictated in the contract.

This provision is an advantage to the Issuer but not the investors so the Issuer will have to pay the investors more to get them to buy the bond even with the presence of this provision.

This additional payment will come in the form of a higher yield. This is why callable bonds have higher yields than non-callable comparable bonds.