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. 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. 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. It is impossible to say without more information. 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. 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. 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. It is impossible to say without more information.

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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