Call provision | Multiple Choice Questions | Long Term Debt Financing | Financial Management | Management Notes
Call Provision Definition
A call provision is a special provision that is stated on indenture of the bonds which gives the issuer of the bond to redeem the bonds before the maturity date. When the issuer calls the bond, they have to pay the call price to the bondholder. A call price is generally above the face value because that price includes a call premium charge for the redemption before maturity.
Call provision allows obtaining low debt securities in the market when the cost of debt in the market is lower than the coupon rate of the bonds. But, to the investors call provision adds risk because their investment may be refunded when the cost of debt is low.
Call Provision MCQs
A call provision grants the bond issuer the:
A. option of repurchasing the bonds prior to maturity at a prespecified price.
B. option to exchange the bonds for equity securities.
C. right to repurchase the bonds on the open market prior to maturity.
D. right to automatically extend the bond’s maturity date.
E. right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds.
The “call” provision on some bonds allows
A) the bondholder to redeem the bond earlier than maturity, but usually involves a call premium.
B) the corporation to request additional capital contributions from the bondholder.
C) the corporation to redeem the bonds earlier than maturity but usually for a premium over the par value.
D) the bondholder to convert the bond into preferred stock.
Which of the following is an important advantage to the issuer of a bond with a call provision?
A. They are able to avoid interest rate risk.
B. They are able to avoid reinvestment rate risk.
C. They are able to reduce their credit risk.
D. They allow for refinancing opportunities.
Which term is used to describe a call provision in which the issuer is prevented from calling a portion or the entire issue for several years during the early years of the bond issue?
A) sinking fund provision
B) Declining Call Provision
C) Deferred call provision