CHAPTER 6 – Valuing Bonds Questions 1. What does a call provision allow the issuer to do, and why would they do it? A call provision on a bond issue allows the issuer to pay off the bond debt early at a cost of the principal plus any call premium. Most of the time a bond issuer is called, it is because interest rates have substantially declined in the economy. The issuer calls the existing bonds and issues new bonds at the lower interest rate. This reduces the interest payments the issuer must pay each year. 2. List the differences between the new TIPS and traditional Treasury bonds. Traditional Treasury bonds have a fixed principal and constant payments. Because the principal and coupon rate are fixed, interest rate changes in the economy cause the market price of the bonds to have large fluctuations. On the other hand, the principal of a TIPS increases with the rate of inflation. Similar to a T-bond, the TIPS has a constant coupon rate. However, since the principal of the TIP...
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