Question

Callable bonds are securities that allow the issuer to repay the bond prior to its original maturity date.

1. What circumstances warrant such a "prepayment" of the existing bond?

2. Why would the issuer wish to repay the bond prior to its original maturity date?

3. What types of "callable bonds" have you issued?

4. What are your thoughts about the benefits and detriments of callable bonds?

Answer 1

1. When the yield rates of bonds fall below certain interest and the price of bonds go up such a prepayment is made to the existing customer. That's why they are called dual life bond as the bond expires at callable date or at yield till maturity.

2. If the interest rates go sown then the company doesn’t want to pay high interests on bond. So it retires the callable bond and issues new bonds at low interest rate prevalent in the market. This helps in saving interest money for the company.
3. Question not very clear as I have never issued callable bond.
4. Benefits of callable bonds for issuer: It helps in interest cost savings when the interest rate falls. The issuer sells callable bonds at a premium to par value and gets extra money for the bond. The investor gets a higher interest rate as callable bonds have higher interest rate.
Demerits of callable bonds:
Investors has the risk of reinvestment . If the issuer calls back the bond the investor will not be able to reinvest at higher interest rate as interest rates might have fallen.

Best of Luck. God Bless