Question

Callable Bonds often contain a restriction on how soon the call feature can be exercised, which is typically ________.

1) 1 year after issuance
2) 5 years after issuance
3) 10 years after issuance
4) cannot be exercised

Answer 1

Callable bonds often have a call protection period that typically lasts for 5 years after issuance. This period restricts the issuer from repaying the bond before this time has elapsed, thus providing security to the investor regarding interest payments.

Step-by-step explanation:

Callable bonds are a type of bond that gives the issuer the right to repay the bond before the maturity date, usually at a premium price. These bonds often contain a restriction known as a call protection period, which defines how soon the issuer can exercise the call option.

While the exact duration of the call protection period can vary, it is commonly 5 years after issuance. This means that the issuer of the bond cannot decide to call back the bond and repay the investors before five years have passed since the bond was issued. This period is designed to provide a measure of security to the investor, assuring them that they will receive interest payments for at least a minimum period of time.

It's important to read the specific bond terms to understand the exact provisions of the call feature, as they can differ from one issue to another.