Series 7 Exam Question 378: Answer and Explanation

Question: 378

Which of the following statements regarding municipal bonds with call provisions is TRUE?

• A. Bonds are likely to be called when interest rates fall.
• B. Call provisions favor investors.
• C. Bonds are likely to be called when interest rates rise.
• D. Call provisions are not advantageous to issuers.

Correct Answer: A

Explanation:

A. The correct answer is Choice (A) because issuers call bonds when interest rates are falling. Choice (B) is incorrect because after the notes are called, new bonds at the lower rate are issued to raise funds in order to call the outstanding bonds with the higher rate. Choice (D) is incorrect because municipal bond call provisions are advantageous to issuers; the call provisions reduce fixed costs by providing issuers with the ability to redeem bonds before maturity.