Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

11. Long Term Liabilities

Introduction to Bonds and Bond Characteristics

Financial Accounting

11. Long Term Liabilities

Introduction to Bonds and Bond Characteristics

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Multiple Choice

When are issuers more likely to call an outstanding bond issue?

When market interest rates have fallen below the bond's coupon rate

When market interest rates have risen above the bond's coupon rate

When the issuer's credit rating has been downgraded

When the bond is trading at a discount

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Verified step by step guidance

Understand the concept of callable bonds: Callable bonds are bonds that the issuer can redeem (or 'call') before their maturity date, typically at a premium to the face value. This feature benefits the issuer, not the bondholder.

Identify the key factor influencing the decision to call a bond: Issuers are more likely to call bonds when they can refinance the debt at a lower cost. This typically happens when market interest rates fall below the bond's coupon rate, allowing the issuer to issue new bonds at a lower interest rate.

Analyze the relationship between market interest rates and the bond's coupon rate: If market interest rates fall below the bond's coupon rate, the issuer can save money by calling the bond and reissuing new bonds at the lower prevailing rates.

Evaluate the other options provided: Rising market interest rates, a downgrade in the issuer's credit rating, or the bond trading at a discount do not provide financial incentives for the issuer to call the bond. These scenarios either increase the cost of refinancing or do not align with the issuer's financial interests.

Conclude that the correct scenario for calling a bond is when market interest rates have fallen below the bond's coupon rate, as this allows the issuer to reduce their interest expense.