don't have call protection ? why ?

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vc

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Consider an issue of $1,000,000 par value,10y,6.5% coupon bonds issued on January 1 , 2002.The bonds are callable and there is a sinking fund provision.The market rate for similar bonds is currently 5.7%.The main points of the prospectus are summarized as follows:

Call dates and prices:
@2002 through 2006,103
@After Jan.1,2007,102

Additional information :
@Prior to January 1,2006,the bonds are non-refundable.
@The sinking fund provision requires that the company redeem $100,000 of the
principal amount each year.
Bonds called under the terms of the sinking fund provision will be redeemed at par
@The credit rating of the bonds is currently the same as at issuance

Using only the above information , should conclude that
(A) investors will pay a premium for the call option
(B) the bonds do not have call protection
(C) the bonds were issued at and currently trade at a premium
(D) given current rates,the bonds will likely be called and new bonds issued.
 
Sorry .wrong post . I got the wrong picture before.
 
Call protection would require there to be some period of time when the bonds can't be called.

Looking at the time intervals in the question, the bonds are sold in Jan 2002, and are immediately callable according to the option schedule:

@2002 through 2006,103
@After Jan.1,2007,102

At all times when the bonds are in the bondholders' hands, they are callable at either 102 or 103. As I read this option schedule, there is no time-gap between the bonds' sale and the (immediate) activation of the callability provisions.

Now, if the option schedule said:

@2003 through 2006,103
@After Jan.1,2007,102

...then you would have 1 year of call protection (Jan 2002 threu Dec 2002)...

@2004 through 2006,103
@After Jan.1,2007,102

...two years of call protection (Jan 2002 thru Dec 2003)...and so on.

All that stuff about the sinking fund and non-refundability are red herrings. And since the option is a benefit to the bond-*issuer* (limiting their downside by setting a max payout), no bond-*buyer* will pay a premium for it.
 
(A) is, of course, out. The call option accrues to the issuer not the investor in any callable bond.
(C) is out primarily because there is no info on the issue price or the current market price.
(D) is probably out but a bit murky. "The market rate for similar bonds is currently 5.7%" is not exactly clear, but the call price is 103 which brings the yield down to a little less than 6% and bags the value of the call option and the sinking fund provision as well as incurring refinancing expenses so this doesn't seem likely.

(B) is the right answer and, I believe, the question wants you to recognize the difference between callable and refundable. A bond is "non-refundable" if the company can't issue new debt to replace it. It is perfectly okay to call the bond prior to 1/1/2006, but then they can't issue new lower interest rate debt until the non-refundable period is over. This makes it less likely the bond will be called since the company would need to find internal sources of funds from operations or sale of assets to replace the debt, but doesn't constitute "call protection".

Some bond maven can probably describe the limits of "non-refundable" better than I can. For example, it is not clear to me if the company can take out a bank loan at a lower interest rate to refund "non-refundable" bonds.
 
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