Multiple Choice
All of the following are true about bonds except:
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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To compensate the bondholders for getting the bond called before maturity, the issuer typically pays which of the following?
A
Accrued interest only
B
A stock dividend
C
A call premium
D
A discount on the bond's face value
Verified step by step guidance1
Understand the concept of a callable bond: A callable bond allows the issuer to redeem the bond before its maturity date, typically to refinance at a lower interest rate.
Recognize the compensation mechanism: When a bond is called early, bondholders lose future interest payments they would have received. To compensate for this loss, issuers often pay a call premium.
Define a call premium: A call premium is an additional amount paid over the bond's face value to incentivize bondholders to accept the early redemption.
Eliminate incorrect options: Accrued interest only refers to interest earned but not yet paid, which is separate from the call premium. A stock dividend is unrelated to bond compensation, and a discount on the bond's face value would reduce the payment, not compensate bondholders.
Conclude that the correct answer is 'A call premium,' as it directly addresses the bondholders' loss due to early redemption.
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