Question

A callable bond is the type of bond which can be redeemed before maturity by paying extra redeem premium. The bond can be called by the issuer (company) when interest rate decreases.

Gilt-Edged Bond is fixed income securities that are issued by the government of England. Because the bond is issued by the government, default risk on these bond is zero, and so it is considered as highly graded bond.

Do you think it is a good idea to redeem these bond before they mature?

Answer 1

Lets explain the problem by understanding a callable bond (also called Redeemable Bond).Such a bond can be redeemed by the issuer (company) prior to the maturity.Since such a bond comes with a provision of callable,interest rates on such bonds is usually higher than bonds without the provision(callable).

As stated in the question the bond can be called by the issuer (company) when interest rates decrease.Yes it’s a good idea to redeem such bonds before maturity as there is no point in paying higher interest rates on the callable bonds when rates have dropped considerably n the market.The best solution available for the issuer is to redeem the existing high interest rate callable bonds and resissue callable bonds at lower rates of interest .

Secondly the question is talking about Gilt-Edged Bond that are issued by Government of England.The bonds are highly graded bond and default risk on the bonds is assumed to be zero.Such bonds as such offer yields which are lower than yields offered by more speculative bonds.However the bonds are still command a heavy portion of investment portfolio due to their high grade.