A call provision embedded in a corporate bond can be viewed as an option held by the and therefore, The __ price of a callable bond will be __ than the price of a similar noncallable bond.
A. issuer, greater
B. issuer, lower
C. investor, greater
D. investor, lower
Answer:B
Explanation: Many corporate bonds contain an embedded option that gives the issuer the right to buy the bonds back at a fixed price either in whole or in part prior to maturity. The feature is known as a call provision. The ability to retire debt before its scheduled maturity date is a valuable option for the issuer for which bondholders will demand compensation. AII else being equal, this compensation will come in the form of bondholders paying a lower price for a callable bond than an otherwise identical option-free (i.e., straight) bond. The difference between the price of an option-free bond and the callable bond is the value of the embedded call option.