Under what conditions would a firm exercise a bond call provision?

Typically, call provisions on bonds are exercised by the issuer when overall market interest rates have fallen. In a falling rate environment, the issuer can call back the debt and reissue it at a lower coupon payment rate.

Why would bond issuers exercise a call provision?

An issuer may choose to call a bond when current interest rates drop below the interest rate on the bond. That way the issuer can save money by paying off the bond and issuing another bond at a lower interest rate. This is similar to refinancing the mortgage on your house so you can make lower monthly payments.

When should a callable bond be exercised?

Purpose of issuing a callable bond

If interest rates are falling, the callable bonds issuing company can call the bond and repay the debt by exercising the call option and refinance the debt at a lower interest rate. In this case, the company can save interest costs.

Why would a firm choose to issue callable bonds?

Companies issue callable bonds to allow them to take advantage of a possible drop in interest rates in the future. The issuing company can redeem callable bonds before the maturity date according to a schedule in the bond's terms.

What are callable bonds and under what circumstances would the issuer make a call?

Callable or redeemable bonds are bonds that can be redeemed or paid off by the issuer prior to the bonds' maturity date. When an issuer calls its bonds, it pays investors the call price (usually the face value of the bonds) together with accrued interest to date and, at that point, stops making interest payments.

Callable Bond Explained - Definition, Benefits

What is a call provision on a bond?

A call provision is a provision on a bond or other fixed-income instrument that allows the issuer to repurchase and retire its bonds. The call provision can be triggered by a preset price and can have a specified period in which the issuer can call the bond.

How do you know if a bond will be called?

Many municipal bonds are callable, which simply means that the issuer can redeem the bonds earlier than the maturity date (i.e. pay back the bonds). Whether a bond is callable or not will be clearly stated along with the bond's other details. The call date or call dates will be specific.

Why would an investor want a callable bond?

Investors like them because they give a higher-than-normal rate of return, at least until the bonds are called away. Conversely, callable bonds are attractive to issuers because they allow them to reduce interest costs at a future date if rates decrease.

What type of firms issue callable bonds?

A firm expecting poorer future investment opportunities is more likely to issue a callable bond. A firm with higher leverage is subject to greater risk-shifting problems, thus is more likely to issue a callable bond. A firm with greater investment risk is more likely to issue a callable bond.

What are 2 key advantages of callable bonds?

Can a callable bond be called at any time?

Issuer has the right to call a bond at any time starting on the first date the bond is callable until its maturity – known as “continuously callable.” European Call. Issuer has the right to call a bond only once on a predetermined date, starting on the first date the bond is callable – known as a “one time only” call.

Under what conditions would bonds sell at a premium?

A bond might trade at a premium because its interest rate is higher than the current market interest rates. The company's credit rating and the bond's credit rating can also push the bond's price higher. Investors are willing to pay more for a creditworthy bond from the financially viable issuer.

Which of the following events would make it more likely that a company would call a callable bond?

The correct answer is B) Market interest rates decline sharply. The callable bonds are more likely to be called by a company when the market rates decline sharply.

What type of risk does a call provision on a bond induce?

A call feature creates uncertainty as to whether the bond will remain outstanding until its maturity date. Investors risk losing a bond paying a higher rate of interest when rates have declined and issuers decide to call in their bonds.

What is a bond call provision quizlet?

call provision. an agreement giving the corporation the option to repurchase the bond at a specific price prior to maturity. allows the company to repurchase part or all of the bond at stated prices over a specified period.

Which of the following is a circumstance in which a callable bond would be called in?

The primary circumstance under which a bond issuer redeems a callable bond is a drop in interest rates. When rates fall, it makes no sense for the bond issuer to continue paying higher-than-average interest to investors when a provision in the bond allows for redemption before its maturity.

Which of the following describes a callable bond?

Answer and Explanation: The answer is: c)They can be called for early retirement at the option of the issuer. A callable bond (also referred to as a redeemable bond) gives the issuer, the right, but not the obligation to buy, redeem or 'call' the bond back from bondholders.

What is the biggest risk to an investor in a bond with call provisions?

What is the biggest risk to an investor in a bond with call provisions? The yield curve may be negatively sloped on the call date.

What is the difference between callable and noncallable bonds?

Callable bonds also come with a call date as part of the agreement, and the issuer is unable to call the bond until the predetermined date. Non-callable bonds, on the other hand, cannot be called until the date of maturity.

How often do agency bonds get called?

Some callable agency bonds are callable at any time, while others are monthly, quarterly or even on only one specific date prior to maturity. Alternatively, some agency bonds are issued with a put provision exercisable by the bond holder, which can benefit the purchaser if yields rise.

Why would an issuer exercise the call feature on a bond they issued quizlet?

A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated price prior to maturity, and this option has a greater chance of being exercised (to the benefit of the bondholder) if market interest rates have fallen since the bond was issued.

What is meant by call provision?

Meaning of call provision in English

a part of an agreement for the sale of a bond which allows the seller to buy back the bond at a particular time for a particular price: High-yield, high-risk bonds, like other bonds, may contain redemption or call provisions.

Who benefits from a call provision on a corporate bond?

A bond with a bond call provision generally has a higher coupon rate, benefiting the bondholders as they get a higher amount annually.

What is an example of a callable bond?

A callable—redeemable—bond is typically called at a value that is slightly above the par value of the debt. The earlier in a bond's life span that it is called, the higher its call value will be. For example, a bond maturing in 2030 can be called in 2020. It may show a callable price of 102.

Which of the following occurrences would increase the chances that a firm calls its outstanding callable bonds?

Which of the following occurrences would increase the chances that a firm calls its outstanding callable bonds? There is a sharp decline in market interest rates.