Your company's investment bank is proposing two similar but slightly different alternatives. The first alternative is a zero-coupon bond issue, where you would issue 10,000 bonds each with a face value of $1000, maturing in 5 years. The annual yield on this bond issue is expected to be 4.7%. The second alternative is the exact same bond, but callable at par any time after the second year. Your investment bank tells you that the market does not seem to be heavily discounting callable bonds, so the yield is only slightly higher, expected to be at 4.9%. The explanation they give you is that, since interests rates for similarly rated firms are at record lows right now, investors are not anticipating that interest rates will drop, so they don't anticipate having the bonds called. Since the yield differential is anticipated to be relatively low, your banker is recommending the callable bond. 

Which alternative should you take?

Discuss why you would choose one alternative over the other. Does the argument being provided by your banker make sense?

Answer rating: 100% (QA)

To decide which alternative to choose we need to consider the advantages and disadvantages of each o... View the full answer