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Callable bonds are attractive to investors because they usually offer higher coupon rates than non-callable bonds. But as always, in return for this investment advantage comes greater risk. If interest rates drop, the bond's issuer will be strongly motivated to save money by replaying it callable bonds and issuing new ones at lower coupon rates.
Some bonds are callable, that is, the issuer has the right to call, or buy back all or some of the bonds before they mature. This often happens when interest rate risk rates fall. For example, consider a callable 10-year, 10% coupon bond issued by XYZ Company. Presumably, XYZ Company issued the debt at prevailing market rates. But as time ...
For example, you buy a bond with a $1,000 face value and an 8% coupon for $900. The bond pays interest twice a year and is callable in 5 years at 103% of face value. Using our YTC calculator, enter: "1,000" as the face value "8" as the annual coupon rate "5" as the years to call "2" as the coupon payments per year "103" as the call premium, and
Let's assume you own a callable bond issued by Company XYZ. The bond has a coupon rate of 5%, $1,000 par value, and maturity of three years. The bond is currently priced at $1,012 and makes an annual coupon payment. It is callable in 1 year. We can use this information to calculate the bond's yield to maturity (YTM).
Noncallable bonds take away the issuer 's flexibility of retiring debt or even restructuring debt. In exchange for this restriction on the issuer, the debt typically carries a lower interest rate. Issuers must be careful before structuring non-callable securities since they will be liable for the interest rate for a long time.
Callable corporate and municipal bonds usually have 10 years of call protection. For example, let's assume XYZ Company issues a 10%, 20-year bond in 2000. If the bond has 10 years of call protection, that means XYZ Company cannot call the bond until at least the year 2010. If interest rates fall to 5% during the first 10 years of the XYZ ...
Callable bonds are attractive to investors because they usually offer higher coupon rates than non-callable bonds. But as always, in return for this investment advantage comes greater risk. If interest rates drop, the bond's issuer will be strongly motivated to save money by replaying it callable bonds and issuing new ones at lower coupon rates.
Many step-up bonds are callable, which gives issuers some protection against falling interest rates. For example, if after three years the XYZ bond is paying 8% but market rates are down to 5% (Scenario A), Company XYZ would be paying a relatively high interest rate on its debt. It would probably call the bonds and reissue the debt at a lower rate.
For example, callable securities (like callable bonds and redeemable preferred stock) carry extra reinvestment risk because if they are called away, the investor will not even collect all the expected interest payments, much less reinvest them effectively. Remember that issuers usually call bonds when interest rates fall, leaving the investor ...
The difference between the face value and the call price is called the call premium. In our example, the call premium is 5% in 2004. In many cases, the call premium is equal to one year's interest if the bond is called in the first year. Intuitively, a callable bond is a traditional, non-callable bond, with a call option attached.