Examples of callable bond in the following topics:
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- Most callable bonds allow the issuer to repay the bond at par.
- With a callable bond, investors have the benefit of a higher coupon than they would have had with a straight, non-callable bond.
- The price behavior of a callable bond is the opposite of that of puttable bond.
- Price of callable bond = Price of straight bond – Price of call option
- Similarly, yield on a callable bond is higher than the yield on a straight bond.
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- Refunding occurs when an entity that has issued callable bonds calls those debt securities to issue new debt at a lower coupon rate.
- Refunding occurs when an entity that has issued callable bonds calls those debt securities from the debt holders with the express purpose of reissuing new debt at a lower coupon rate.
- On the contrary, nonrefundable bonds may be callable, but they cannot be re-issued with a lower coupon rate (i.e., they cannot be refunded).
- Bond refunding occurs when all three of the following are true
- The sinking fund has accumulated enough money to retire the bond issue.
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- For bond issuers, they can repurchase a bond at or before maturity.
- To be detailed, the bond issuer will repurchase bonds with callability.
- These bonds are referred to as callable bonds.
- Most callable bonds allow the issuer to repay the bond at par.
- In this case, the price at which bonds are redeemed is predetermined in bond covenants.
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- The entire bond issue can be liquidated by the maturity date.
- The firm may repurchase a fraction of outstanding bonds at a special call price associated with the sinking fund provision (they are callable bonds).
- However, if the bonds are callable, this comes at a cost to creditors, because the organization has an option on the bonds: The firm will choose to buy back discount bonds (selling below par) at their market price,while exercising its option to buy back premium bonds (selling above par) at par.
- In this case, the firm's gain is the bondholder's loss–thus callable bonds will typically be issued at a higher coupon rate, reflecting the value of the option.
- Describe how a sinking fund operates in regards to a bond issue
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- Most bonds have a term of up to 30 years.
- Normally the maturity of a bond is fixed.
- However, it is important to note that bonds are sometimes "callable,"which means that the issuer of the debt is able to pay back the principal at any time.
- In this case, the maturity date is the day when the bond is called.
- Thus, investors should inquire, before buying any fixed-income securities, whether the bond is callable or not.
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- In finance, bonds are a form of debt: the creditor is the bond holder, the debtor is the bond issuer, and the interest is the coupon.
- Bonds are debt instruments issued by bond issuers to bond holders.
- High-yield bonds are bonds that are rated below investment grade by the credit rating agencies.
- Callability — Some bonds give the issuer the right to repay the bond before the maturity date on the call dates.
- Most callable bonds allow the issuer to repay the bond at par.
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- The most common secured bonds.
- This bears the owner's name on the bond certificate and in the register of bond owners kept by the bond issuer or its agent, the registrar.
- A term bond matures on the same date as all other bonds in a given bond issue.
- Serial bonds in a given bond issue have maturities spread over several dates.
- A bond with nondetachable warrants is virtually the same as a convertible bond; the holder must surrender the bond to acquire the common stock.
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- If a bond's coupon rate is more than its YTM, then the bond is selling at a premium.
- If a bond's coupon rate is equal to its YTM, then the bond is selling at par.
- Yield to call: when a bond is callable (can be repurchased by the issuer before the maturity), the market looks also to the Yield to call, which is the same calculation of the YTM, but assumes that the bond will be called, so the cash flow is shortened.
- Yield to worst: when a bond is callable, puttable, exchangeable, or has other features, the yield to worst is the lowest yield of yield to maturity, yield to call, yield to put, and others.
- You pay $90 for the bond.
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- It is senior (i.e. higher ranking) to common stock, but subordinate to bonds in terms of claim (or rights to their share of the assets of the company).
- In other words, in the case of liquidation or bankruptcy, preferred stock will have claim to assets before common stock, but after corporate bonds or other debt instruments.
- Similar to bonds, preferred stocks are rated by the major credit-rating companies.
- The rating for preferreds is generally lower, since preferred dividends do not carry the same guarantees as interest payments from bonds, and they are junior to all creditors.
- Preferred Stocks are considered a hybrid security with properties of both stocks and bonds, but are subordinate to bonds when it comes to rights of claim to company assets.
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- Other long-term obligations, such as bonds, can be classified as current because they are callable by the creditor.
- When a debt becomes callable in the upcoming year (or operating cycle, if longer), the debt is required to be classified as current, even if it is not expected to be called.
- In situations where a debt is not yet callable, but will be callable within the year if a violation is not corrected within a specified grace period, that debt should be considered current.
- These usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.