Peregrine Foundations of Business Finance Practice Test

A call provision in corporate bonds is best described as a feature allowing early redemption of the bond. This means that the issuer of the bond has the right to redeem the bond before its maturity date, usually at a specified price. This feature is beneficial to issuers if interest rates decline, as they can refinance debt at a lower cost by calling the existing bonds and issuing new ones at the prevailing lower interest rates.

The other options do not accurately describe a call provision. A penalty for late payments pertains more to terms of payment and default rather than the specific feature of calling the bond. The condition for a high coupon rate is not directly related to call provisions, as bond yields and coupons are influenced by multiple factors, including market interest rates and credit risk. Lastly, a requirement for collateral backing refers to secured bonds, where specific assets are pledged as security, which is a separate concept from the call feature.