Question

Which two of the following five statements are correct?

Select two alternatives:

• A convertible bond can be thought of as a regular bond plus a special type of put option called a warrant.
• The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate she is currently receiving.
• A private placement is a bond issue that does not trade on a public market but rather is sold to a small group of investors.
• Notes typically have longer maturities (more than ten years) than debentures.
• The call price of a callable bond is generally set at or below, and expressed as a percentage of, the bond's face value.

Answer 1

The two statements which are correct are 2nd and 3rd statement

Explanation:First statement is incorrect because convertible bond is like a regular bond with call option called warrant not put option

Second statement is correct because when market rate becomes lower than coupon rate then company calls the bond so that they can issue new bonds at lower rate and investor is now bound to invest in lower coupon rates .

Third statement is correct as the name suggests these bonds are privately placed or issued to some particular investors or small group of investors

Fourth statement is incorrect because Notes have shorter duration as compared to debenture .Their duration is not longer than 10 years .

Fifth statement is incorrect because when company calls the bond ,they need to pay amount higher than par value or we can say premium .