Question

Matthew recently invested in 15-year Bathtub Brewing Company bonds paying 8% interest annually, with a maturity date of 2035. The bonds are callable in 2030. If interest rates go down to 5.5% in the year 2030, the brewery is likely to________.A. give bondholders a choice of whether they want to turn the bonds back to the brewery.
B. exercise the call.

C. decrease the interest rate that they are willing to pay the holder.

D. not exercise the call.

Answer 1

Answer:

B. Exercise the call

Explanation:

The brewery can exercise the call of issuing the bonds because now the interest rate has decreased on the bond and it becomes less profitable to the bondholders/ public therefore the brewery wants to call provisions on bonds where they can buy back the bonds when they reach a falling rate.