A callable bond with a 6% coupon rate, redeemable at par in 7 years, is currently trading at a premium. If interest rates have fallen significantly since issuance, which of the following is most likely to occur?

Question: A callable bond with a 6% coupon rate, redeemable at par in 7 years, is currently trading at a premium. If interest rates have fallen significantly since issuance, which of the following is most likely to occur?

Answer options: ✅ The issuer will likely call the bond, and the investor will receive the face value.

• The issuer will likely not call the bond, as it is cheaper to allow it to mature.
• The bond's yield-to-maturity will significantly exceed its yield-to-call.
• The investor will benefit from the higher coupon rate until maturity.

Correct answer: The issuer will likely call the bond, and the investor will receive the face value.

Explanation: If interest rates have fallen, the issuer can refinance its debt at a lower cost. Calling the existing bond allows them to issue new debt at the prevailing lower rates, saving on interest expenses.