Financial market trading involves many products and processes. Traded instruments include callable bonds. Explains callable bonds’ operation.
Definition of callable bond
Before maturity, callable bonds can be “called back”. Bonds can be repurchased at call. Bond call prices usually exceed face.
Callable bonds provide issuers flexibility. If interest rates fall, the issuer may call back the bond and issue new debt at a lower rate. It may lower issuer borrowing costs. If interest rates rise, the issuer may not call back the bond since it would have to issue new debt at a higher rate.
How Callable Bonds Work
Procedure for callable bonds. Example: Company XYZ issues a $1,000 callable bond with 5% coupon. The 10-year bond can be called at $1,050 after 5 years.
This bond pays 5% annually. Company XYZ may redeem the bond at $1,050 in 5 years. Unless called back, the bond pays interest until maturity.
A callable bond is dangerous for investors. You obtain the call price and forfeit the remaining interest payments by calling back the bond. If rates have fallen since you bought the bond, it may be challenging to obtain a similar yield.
Considerations for Callable Bond Investment
Consider these callable bond investment factors:
Investors get the yield-to-call if the bond is called back on the first call date. Estimated ROI.
Call protection prevents the issuer from calling back callable bonds. Minimum interest payment length protects investors.
Rate risk affects callable bonds. Rising interest rates reduce bond call probability, whereas falling rates boost it. Know interest rates, investors.
Learn callable bond terms before investing. Read the bond prospectus and consult a financial advisor to invest wisely.
Sources and References
To gain more knowledge about callable bonds and trading in general, you can refer to the following sources and references:
- Investopedia: https://www.investopedia.com/terms/c/callablebond.asp
- Corporate Finance Institute: https://corporatefinanceinstitute.com/resources/knowledge/finance/callable-bond/
- Financial Times: https://www.ft.com/content/32a4dfc8-046f-11e9-99df-6183d3002ee1
By educating yourself and staying informed about the intricacies of callable bonds, you can navigate the trading world with more confidence and make better investment decisions.