Investors are willing to purchase bonds with a call feature if the bonds offer a slightly higher return than bonds without a call feature. This is because the call feature gives the issuer (the entity that issued the bond) the right to redeem or "call" the bonds before they reach maturity.
1. By including a call feature, the issuer has the flexibility to take advantage of lower interest rates in the future by calling the bonds and issuing new ones at a lower rate. This flexibility is a benefit to the issuer but poses a risk to the bondholder, as they may lose the opportunity to continue earning interest at the original rate if the bonds are called.
2. To compensate for this risk, investors expect a slightly higher return when purchasing bonds with a call feature compared to bonds without a call feature. This higher return acts as a cushion against the possibility of the bonds being called early, which would prematurely end the steady stream of interest payments for the bondholder.
Therefore, the correct answer to the question is:
B. slightly higher return than bonds without a call feature.
