Question

Callable bonds are securities that allow the issuer to repay the bond prior to its original maturity date. 200-500 words

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

What types of "callable bonds" can you encounter in your personal life?

Answer 1

Callable Bonds;-

Callable bonds are bonds that can be paid off by the issuer prior to the bond's maturity date. An issuer may choose to call a bond when current interest rates drop below the interest rate on the bond. That way the issuer can save money by paying off the bond and issuing another bond at a lower interst rate. callable bonds aremore riskey for investors than non callable bond because an investor whose bond has been called is often faced with reinvesting the money at a lower, less attractive rate .

Callable bonds may be called prior to maturity and, thus, term of the investment may be shorter than exected. The option to callable bond belongs to the issuer and not the investor. Generally, the issuer may call the bons if it canreissue debt with lower cocupon rates adreduce cost of capital

although a callable bond is a higher cost to the issuer and an uncertainty to the investor compaing to a regular bond, it is actually quite attractive to both issuer and investors. For issuers,callable bonds allow them toreduce interest cost at a future data should rate devrease.

A Callable bond is typically called at a value that is slightly above the parvalue of the debt. The earlier in a bond's life span that it is called the higher its call value will be. For exmaple;- A bond maturing in 2020can be called in 2010. It may show a callable price of 102. This price means the invesstor receives $1150 for each $1000 in face value of their investment.

Types of callable bonds;-

American callable bond;-  Issuer has the right to call a bond at any time starting on the right to call a bond at any time starting on the first date the bond is callable until its maturity known as "continuously callable"

European callable:-  Issuer has the right to call a bond only once on a pre determined date, starting on the first date the bond is callable known as a " One Time Only" callable bond

Bermuda Callable bond:- Issuer has the right to callable bond  on a predetermined schedule.

Canary callable bond:-Callable by a predetermined call scheduleup to period of time, then either called or converted to a bullet structure moving forward.

Tax law changes call:- Issuer has the right to collable bond when tax laws change in a way that has an adverses impact on the issuer.

Prior to its origina maturity date

The bond issuer also agress to repay you the original sum loaned at the bond's maturity date. This is the date on which the principal amount of a bond also known as the 'par value' is to be paid in full. A bond's maturity usually is set when it is issued

Bond often are referred to as being short medium or long term. Generally, a bond that matures in one to three year is referred to as a short term bond. Medium or intermediate term bonds generally are those that mature in four to 10 years and long term bonds are thoses with maturities greater than 10 years.

Not all bonds reach maturity, even if you want them to. Callable bonds ae common: they allow the issuer to retire a bond before it matures. Call provisions are outlined in the bond's prospectus and the indenture both are document that explain a bond's terms and conditions. While firm are not formally required to document all call provision terms on the customer's ocnfirmation statement.

Callable bonds encounter in our personal life;

Callabe bonds typically pay a higher coupon or interest rate to investors than non callable nonds. The companies that issue theses products benefit as well. Should the market interest rate fall lower than the rate beingpaid to the bondholders, the business may call the note. They may then, refinance the debt a t a lower interst rate. This flexibility is usually more fovorable for the business than using bank based lending.

However, not every aspect of a callable bond is favorable. An issuer will usually call the bond when interst rate fall. This calling leaves the inestor exposed toreplacing the investment at a rate that will not return the same level of income. Conversely, when market rates rise, the investor can fall behind when their funds ae tied up in a product that pays a lower rate. Finally companies must offer a higher coupon attract investors.

Municipal bonds;- Most municipal bonds and some corporate bonds are callable. A municipal bonds has call features that may be exercised after a set period susch as 10 year.

Sinking fund;- Redemption requieres the issuer to adhere to a set schedule while redeeming a portion or all of its debt. On specified dates, the company will remit a portion of the bond to bondholders.