Question
LLB Co. recently issued a series of callable bonds with an attractive coupon to help raise capital for their South American division. The company offers
LLB Co. recently issued a series of callable bonds with an attractive coupon to help raise capital for their South American division. The company offers a call penalty on the bonds. Sam decided to purchase a 5-year, $50,000 LLB bond because he expects the call penalty to protect him from any financial problems that the company may encounter. All of the following statements regarding Sam's bond are true, EXCEPT:
if LLB calls the bond when market interest rates are lower than the bond's coupon, Sam will lose out on the higher interest rates offered by the bond.
LLB can choose to redeem the bond to meet a sinking fund obligation after a time specified in the trust indenture.
if LLB elects to call his bond and Sam does not redeem it, he will continue to earn interest on the bond.
if LLB elects to call the bond after three years, Sam will receive a lump sum payment of $50,000 plus a redemption amount based on the call penalty.
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