Stanley Corporation is planning to issue new 20-year bonds. Initially, the plan

Question

Stanley Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bond non-callable. If the bond were made callable after 5 years with a 5% call premium, how would this affect the bond's required rate of return?

a.   It is impossible to say without more information.

b.   Because of the call premium, the required rate of return would decline.

c.   There is no reason to expect a change in the required rate of return.

d.   The required rate of return would decline because the bond would then be less risky to a bondholder.

            e. The required rate of return would increase because the bond would then be more risky to a bondholder

Explanation / Answer

e. The required rate of return would increase because the bond would then be more risky to a bondholder

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