Tucker Corporation is planning to issue new 20 year bonds. The current plan is t

Question

Tucker Corporation is planning to issue new 20 year bonds. The current plan is to make the bonds non callable, but this may be changed. If the bonds are made callable after 5 years at a 5%call premium, how would this affect their required rate of return?

A. It is impossible to say without more information.
B. The required rate of return would decline because the bond would then be less risky to a bondholder.
C. Because of the call premium, the required rate of return would decline.
D. The required rate of return would increase because the bond would then be more risky to a bondholder.
E. There is no reason to expect a change in the required rate of return.

Explanation / Answer

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

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