Question

Discuss the reasons why a corporate bond with restrictive covenants may trade at a different yield to a callable bond issued by another company.

Answer 1

Corporate Bond with restrictive covenant will be trading at different yield to a callable bond issued by another company because callable bonds will always be having a lower interest rate because their prices are adjusted with the embedded feature of being called.

Callable bonds are having a feature that if issuer can call them, when they will be feeling that it is wise to call back the bonds at the prevalent market interest rate, as it has gone lower, so there is always reinvestment risk associated with these bonds.callable bonds are not for those investors who are seeking a stable rate of return from the market.

So corporate bonds with restrictive covenants will be trading at different price in comparison to callable bonds due to the features which are embedded in those bonds and these bonds are are representative of the bond yields so when they are being traded those traders are going to discount these features and not just the the Bond Yield are different, volatility are also different and other features associated with bonds are also different.