Question

What are the benefits of a company using a call provision on a long-term bond issue? What are the potential costs? Provide real world examples

Answer 1

Rat positively. Message if any clarification is required.

Benefits of a Company using a call provision on a long-term bond issue:

A call provision in long-term bond is a clause associated with bond that is granting issuing company a right to call back, buy back bonds, fully or in parts before its maturity.

Benefits of a company using call provision in long term bonds are given below,

1. In case Interest rate fall then Issuer Company will use call provision to call back or buy back the bonds to save it from paying higher interest.

2. When the purpose of funding and reinvestment is over.

3. Company can reduce the interest liability if fund is not required by exercise call option in part.

The potential Cost of callable Long-Term Bond:

The potential cost of call option long term bond is higher as risk factor of call option is associated with it. Cost is higher than those bonds in which call option is not available.

Real Life example:

We are giving a real life example of Jyske Realkredit company on NASDAQ dated 26^th May, 2020 is doing announcement related with Fixed rate callable bonds of two types, one with 1.5% 30 year annuity bond and maturity on 1^st October, 2053; second is 1.5% 30 year annuity bond with interest only option and maturity on 1st October, 2053.