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 covenants trade differently to that of callable bonds because both type of bonds have different characteristics and different types of demand and a different group of investor as well

Callable bonds are those bonds can be called by the company if the company feels that it is paying higher rate of interest in the prevalent market rate of interest so it will be calling upon its bonds and the bonds will be having a high reinvestment risk along with high rate of interest because they are callable in nature.

Normal bonds with restrictive covenants will still be preferable by investors because they are highly secured bonds and those are also offering up with a higher rate of interest and they have no reinvestment risk present with them.

So, it can be summarised that corporate Bond with restrictive covenant may trade at a different yield to normal callable bonds, as these differences could be attributed to the callable feature and reinvestment risk along with other risk of having a low rate or high rate of interest.