medium · Debt Capital Markets bond-instruments-structures
What is the primary risk an investor takes when buying a premium bond that has an embedded call option?
- The issuer may call the bond at par, resulting in an immediate capital loss for the investor.
- The issuer raises the stated coupon rate, which then causes the bond's market price to drop.
- The bond's yield to maturity must rise to match the bond's higher stated coupon rate.
- The investor is contractually forced to sell the bond back to the issuer at a deep discount to par.
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