Call Options Are Also Frequently Attached to Bonds, Making Them

Essay

Call options are also frequently attached to bonds, making them callable at the option of the issuer. Consider a firm that just issued two sets of bonds: One is callable, has an 8% coupon rate, 10 years to maturity, and can't be called in the first five years; the second is non-callable, has an 8% coupon rate, 10 years to maturity, and is identical to the first bond in every way except for the call option. Suppose the non-callable bonds are sold for $1,000 each. Will the callable bonds sell for more or less? Who "purchases" the option in this case and who "sells" it?