Callable bonds are issued so that if future interest rates increase the municipality can pay off the bonds.

Callable bonds are issued so that if future interest rates increase the municipality can pay off the bonds.

• A. Not stated
• B. Not applicable
• C. False
• D. True

Answer: (C)

Callable bonds include a call feature that lets the issuer redeem the bonds before they mature, primarily to refinance at lower interest rates. If rates fall, the issuer can pay off the old bonds and issue new ones at a cheaper cost. When rates rise, calling the bonds wouldn’t lower borrowing costs, so issuers typically don’t exercise the call. So the idea that callable bonds are issued to pay off the bonds if rates increase isn’t correct; the real purpose is to take advantage of falling rates. That’s why this statement is false.

Callable bonds include a call feature that lets the issuer redeem the bonds before they mature, primarily to refinance at lower interest rates. If rates fall, the issuer can pay off the old bonds and issue new ones at a cheaper cost. When rates rise, calling the bonds wouldn’t lower borrowing costs, so issuers typically don’t exercise the call. So the idea that callable bonds are issued to pay off the bonds if rates increase isn’t correct; the real purpose is to take advantage of falling rates. That’s why this statement is false.