An issue of 8.5% Series C preferred stock has a par value of $75 million or $40 per share and was sold to investors several years ago at par. According to the terms of the issue, the preferred is scheduled to be redeemed in 25 years at its par value of $40 per share. Dividends are paid quarterly but analyzed as if paid annually. The stock is currently trading at a discount for $35 per share.

11. As an alternative to having the Trustee randomly select the shares to be redeemed, suppose the issuer is permitted to purchase preferred shares on the open market in order to fulfill its obligation to redeem shares. Specifically, the company can buy the shares at the market price and present them for cancellation rather than pay the Trustee $40 per share for the shares to be redeemed. Which of the following statements is most correct?

1. The issuer would exercise this Delivery Option when the price is less than $40.
2. The issuer would exercise this Delivery Option when the price is greater than $40.
3. The issuer would exercise this Acceleration Option when the price is less than $40.
4. The issuer would exercise this Acceleration Option when the price is greater than $40.
5. The issuer would most likely never exercise this Delivery Option unless the price is less than $25.