Answer (B) is correct . A bond issued at par may carry a lower coupon rate than other similar bonds in the market if it has some feature that makes it more attractive to investors. For example, a sinking fund reduces default risk. Hence, investors may require a lower risk premium and be willing to accept a lower coupon rate. Other features attractive to investors include covenants in the bond indenture that restrict risky undertakings by the issuer and an option to convert the debt instruments to equity securities. The opportunity to profit from appreciation of the firm’s stock justifies a lower coupon rate. An improvement in a bond’s rating from Aa to Aaa (the highest possible) also justifies reduction in the risk premium and a lower coupon rate. However, a call provision is usually undesirable to investors. The issuer may take advantage of a decline in interest rates to recall the bond and stop paying interest before maturity.
Answer (A) is incorrect because A sinking fund is a feature attractive to investors that may result in their acceptance of a lower coupon rate.
Answer (C) is incorrect because An improved rating is a feature attractive to investors that may result in their acceptance of a lower coupon rate.
Answer (D) is incorrect because A conversion option is a feature attractive to investors that may result in their acceptance of a lower coupon rate.
