Question

1. What is a call feature? What are stock purchase warrants?
2. What is the current yield for a bond? How are bond prices quoted?

Answer 1

1)  A call feature in the bond will help the issuer to redeem the bond before maturity. When the bond is called, the bondholder receives the parvalue or sometimes moreand does not receive any more coupons. Callable bonds are issued to allow the issuers to hedge against interest rate risk.

2) A stock warrant gives the holder the right to purchase a company's stock at a specific price and at a specific date. A stock warrant is issued directly by the company concerned; when an investor exercises a stock warrant, the shares that fulfill the obligation are not received from another investor but directly from the company.

3) When investors purchase bonds, they do so primarily to generate income. The expected annual rate of return is called the current yield, and it is a function of the current price and the amount of interest the bond pays. The current yield is equal to the annual interest earned divided by the current price of the bond.

4) A bond quote is the price at which a bond is trading. It’s usually expressed as a percentage of par value. The price that someone is willing to pay for the bond is given in relation to 100 (or par value). A bond quote above that means that the bond is trading above par and vice versa for a bond quote below 100.