honeycfa

Which of the following is most accurate about a bond with a deferred call provision?

A) It could be called at any time during the initial call period, but not later.

B) Principal repayment can be deferred until it reaches maturity.

C) It could not be called right after the date of issue.

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A deferred call provision means the issue is initially (say, for the first 5 to 7 years) non-callable, after which time it becomes freely callable. In other words, there is a deferment period during which time the bond cannot be called, but after that, it becomes freely callable.

honeycfa

Which of the following is TRUE about the call feature of a bond? It:

A) stipulates whether and under what circumstances the bondholders can request an earlier repayment of the principal amount prior to maturity.

B) stipulates whether and under what circumstances the issuer can redeem the bond prior to maturity.

C) describes the maturity date of the bond.

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Call provisions give the issuer the right (but not the obligation) to retire all or a part of an issue prior to maturity. If the bonds are “called,” the bondholder has no choice but to turn in his bonds. Call features give the issuer the opportunity to get rid of expensive (high coupon) bonds and replace them with lower coupon issues in the event that market interest rates decline during the life of the issue.

Call provisions do not pertain to maturity. A put provision gives the bondholders certain rights regarding early payment of principal.

honeycfa

Which of the following statements about the early retirement of debt is least accurate?

A) Noncallable bonds generally cannot be retired for any reason prior to maturity.

B) Non-refundable bonds prohibit a company from calling an issue financed by the proceeds of a lower cost refunding bond issue.

C) When bonds are redeemed under sinking fund provisions, the call price is known as the "regular redemption price."

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When bonds are redeemed to comply with sinking fund provisions, the call price is known as the “special redemption price.” When bonds are redeemed according to the call provisions specified in the bond indenture, the call price is known as “regular redemption price.”

honeycfa

Which of the following statements about refunding and redemption is most accurate?

A) An investor concerned about premature redemption is indifferent between a noncallable bond and a nonrefundable bond.

B) A sinking fund is an example of refunding.

C) Bonds redeemed at the special redemption price are typically redeemed at par.

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This statement is accurate. When bonds are redeemed to comply with a sinking fund provision or because of a property sale mandated by government authority, the redemption prices (typically par value) are referred to as "special redemption prices." When bonds are redeemed under the call provisions specified in the bond indenture, these are known as a regular redemptions and the call prices are referred to as "regular redemption prices." 

The other statements are false. A sinking fund is a type of redemption, which refers to the retirement of bonds. An investor concerned about premature redemption would prefer a noncallable bond because a noncallable bond cannot be called for any reason. A bond that is callable but nonrefundable can be called for any reason other than refunding. The term refunding specifically means redeeming a bond with funds raised from a new bond issued at a lower coupon rate. A nonrefundable bond can be redeemed with funds from operations or a new equity issue.