Question

Consider a corporate bond with refunding protection and a different corporate bond with call protection. Briefly describe a situation in which a company might call a bond but not refund the bond. In other words, describe a situation in which a bond is **Called but not refunded***

Answer 1

Let us first understand the meaning of the Bond with call protection.

• Bond With Call Protection

Bond with call protection is the safeguard to the investor in case when the interest rate prevailing in the market is getting cheaper than the company paying interest on the bonds.

To give investors some time to take advantage of any appreciation in the value of the bonds, a call protection protects bondholders from having their bonds called (Buy Back)  by issuers during the early stages of a bond’s life. Call protection can be extremely beneficial for bondholders when interest rates are falling, because it prevents the issuer from forcing redemption early on in the life of a security.

This means that investors will have a minimum number or years, regardless of how poor the market becomes, to reap the benefits of the security.

• Bond with refunding protection

Bond protection is a provision of a bond which prevent an issuer from using the cheaper debt for redeeming issue of bond before maturity.

We can say that in refunding protection, the company can buy back the bonds when the prevailing interest rates in the market is lower only when the company not use the cheaper refinancing option.

• Called but not refunded

When we combined the meaning of both the bond, we can understand the meaning of called but not refunded bond.

It mean that the company can call the bond for the buy back but the company cannot use the cheaper debt refinancing source.

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