Think carefully about the call and convertibility provision of bonds. Parts a - d are covered perfectly in the text but you need to read carefully. Part e requires some critical thinking.

a) What is a callable bond?

b) Does the call feature benefit the company that issues the bond or the bondholder? Why?

c) What is a convertible bond?

d) Does the convertibility feature benefit the company or the bondholder? Why?

e) Suppose a company offers both callable and convertible bonds to investors at a price of $1000 and both types of bonds have the same maturity and both are rated A.

Would you expect the coupon rate to be higher on the callable bond or on the convertible bond? Why?