Special Features and Interest Rates

Adding special features to bonds, such as linking coupon payments to commodity prices or catastrophes, will reduce their attractiveness to investors and make the interest rates paid on them higher. It follows then that a. companies should not add these special features to bonds b. adding these special features cannot create value for the firm if the bonds are fairly priced.

c. adding special features can still create value even if the bonds are fairly priced Explain.

were earnings an extra yield of almost 1.5% on the principal-at-risk bonds and almost 0.5% on the principal-protected bonds.

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