Section 5, Features of Corporate Bonds

Callable Bonds

A bond that can be redeemed early by the issuer at a pre-established premium price after a specified date

Callable Bonds are advantageous to

Issuers

Who benefits form call features-issuer or investor?

The issuer benefits; Investors do not.

What type of call price is attractive to an issuer?

A low call price

What kind of call premium is unattractive to an issuer?

A high call premium or call price

How can a call price limit a bonds price appreciation?

If interest rates fall, the issuer may call in a high-coupon bond, capping potential gains

Call Protection

The fixed time period during which bonds may not be called by the issuer.

For Callable Bonds, Bondholders want

interest rates to declined and bond prices to rise

How does coupon rate affect call likelihood?

Higher coupon rates increase the chance of being called, as issuers can refinance at lower rates

Which securities can be Callable?

Bonds and preferred stock (not common stocks)

Call Premium

The extra amount above the par value that a company must pay if it calls a bond that has a call provision.

How does calling bonds affect the issuer’s financial position?

Improves the creditworthiness and decreases the debt-to-net worth ratio

During a Notice of Call, Investors may

Convert the Bonds, Sell bonds, or wait for the redemption date

What happens to interest payments after a bond is called?

They Stop

Why do callable bonds usually trade at lower prices?

Call features are undesirable to investors.

Partial Call

When an issuer redeems only part of a bond issue before maturity.

Convertible Bonds

Bonds that can be converted into common stock at the bondholder's option

Is concerting a convertible corporate bond into a common stock a taxable event?

No. The conversion itself is not a taxable event

Taxes are only triggered when the stock is sold after its conversion

Conversion Price

The set price at which a convertible bond can be exchanged for shares of common stock

Common Shares Received (Formula)

Par Value (1,000)
————————
Conversion Price

Why is the coupon rate on convertible bonds usually lower than on non-convertible bonds of the same quality?

Because convertibility is an added benefit for the investor.

What advantage does a conversion feature give bondholders?

It allows them to participate in the growth of the issuers common stock.

what are convertible securities more volatile than non convertible ones?

Their value is tied to the market value of common stock, which tends to fluctuate more than preferred stock.

Refunding Bonds

The sale of a new issue of bonds, the proceeds of which are used to retire an outstanding issue. Refunding is generally done when there is a sharp decline in interest rates.