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The specifics vary from bond to bond, but callable bonds always have one thing in common — the issuer can pay off the bond early. As an investor, there are potential benefits and drawbacks to ...
Another way to look at this interplay is that, as interest rates go down, the present values of the bonds go up; therefore, it is advantageous to buy the bonds back at par value. With a callable bond, investors have the benefit of a higher coupon than they would have had with a non-callable bond. On the other hand, if interest rates fall, the ...
Bonds of this type include: Callable bond: allows the issuer to buy back the bond at a predetermined price at a certain time in future. The holder of such a bond has, in effect, sold a call option to the issuer. Callable bonds cannot be called for the first few years of their life. This period is known as the lock out period.
Therefore, if interest rates fall and bond prices rise, a firm will benefit from the sinking fund provision that enables it to repurchase its bonds at below-market prices. 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.
Types of bonds more likely to be affected by reinvestment risk: Callable bonds, short-term bonds, zero-coupon bonds, mortgage-backed securities and asset-backed securities. 4. Liquidity risk
In the context of an MBS or callable bond, the embedded option relates primarily to the borrower's right to early repayment, a right commonly exercised via the borrower refinancing the debt. These securities must therefore pay higher yields than noncallable debt, and their values are more fairly compared by OAS than by yield.
If you're a savvy investor, you're likely looking for ways to diversify your investment portfolio. Callable certificates of deposit (CD) are a way to invest your money for several years with a ...
For example, many bonds are convertible into common stock at the buyer's option, or may be called (bought back) at specified prices at the issuer's option. Mortgage borrowers have long had the option to repay the loan early, which corresponds to a callable bond option.