1. Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to

Question

1.        Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to make the bonds non- callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

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

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

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

d.       It is impossible to say without more information.

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

Explanation / Answer

c.The required rate of returnwould increase becausethe bond wouldthen be more riskyto a bondholder.

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