Which of the following statements is CORRECT?

a. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.

b. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.

c. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.

d. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.

e. The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward stoping, the required rate of return will be lower on the callabe bond.

To determine which statement is correct, we need to analyze each option individually.

a. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.

To evaluate this statement, we need to understand the relationship between bond prices and interest rates. When interest rates are below the coupon rate (the rate of interest the bond pays), the bondholder is less likely to exercise the call option since they wouldn't be able to reinvest the funds at a higher interest rate. Therefore, the difference in prices between the callable and non-callable bonds would be greater if the current market interest rate is below the coupon rate.

b. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.

To evaluate this statement, we need to consider the characteristics of callable bonds. Callable bonds give the issuer the right to redeem the bonds early, typically at a specified price called the call price. Since callable bonds provide flexibility to the issuer to retire the debt, the issuer typically pays a higher interest rate to compensate the bondholder for taking on the call risk. Therefore, a callable bond with the same maturity and coupon rate should sell at a higher price due to the additional compensation for the call feature.

c. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.

To evaluate this statement, we need to consider the perspective of corporate treasurers. Callable bonds have the potential for early redemption by the issuer, which could create a burden on the company if they need to raise additional funds earlier than planned. Therefore, corporate treasurers may dislike issuing callable bonds because they introduce the risk of having to raise capital sooner than if noncallable bonds were used.

d. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.

This statement is the opposite of option a. If the current market interest rate is above the coupon rate, the bondholder is more likely to exercise the call option since they can refinance at a lower interest rate. Therefore, the difference in prices between the callable and non-callable bonds would be greater if the current market interest rate is above the coupon rate.

e. The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.

This statement relates to the longevity of callable bonds compared to noncallable bonds. Callable bonds have the potential for early redemption at the discretion of the issuer. As a result, the actual life of a callable bond can be shorter than the stated maturity. Therefore, if the yield curve is upward sloping (indicating higher interest rates in the future), the required rate of return on the callable bond may be lower due to the possibility of an early call.

Based on the evaluation of each statement, the correct statement is:

b. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.