SIE Exam Question 655: Answer and Explanation

Question: 655

During a recent recession, your client, Charles, purchased high- yield corporate bonds that now face minimal default risk. However, he's now concerned that the various corporations may decide to call their bonds. You tell Charles that corporations are likely to call their bonds when:

• A. interest rates are expected to drop.
• B. the bonds are selling at a significant premium.
• C. inflation is expected to rise.
• D. interest rates have declined.

Correct Answer: B

Explanation:

If corporate bonds are selling at a significant premium, then newly issued bonds are selling with lower coupons. The corporations are likely to call their bonds and replace them with lower coupon bonds.