SIE (Training Consultants v3.5, 2025): Ch. 2 Debt Securities, Sec. 5 - Features if Corporate Bonds

Who benefits from a call feature on a bond?

The issuer, not the investor.

What does a call provision specify?

The callable date and the price at which the bond can be called.

Why is a high coupon bond more likely to be called?

Because issuers can replace it with a new bond at a lower interest rate.

Is common stock callable?

No, only bonds and preferred stock can be callable.

What happens when a company calls its bonds?

Bondholders receive par value + call premium + accrued interest; company’s debt decreases and creditworthiness improves.

What must issuers provide before calling bonds?

A “Notice of Call.”

What choices do investors have after receiving a notice of call?

Convert the bonds, sell the bonds, or wait for redemption.

Do interest payments continue after a bond is called?

No, interest payments stop.

Why do callable bonds usually trade at lower prices?

Because call features are undesirable to investors.

How are bonds selected in a partial call?

On a random basis.

What is the formula for determining shares from a convertible bond?

Par Value ÷ Conversion Price = Shares received.

If a bond has a par value of $1,000 and a conversion price of $50, how many shares are received upon conversion?

20 shares.

How does the coupon rate of a convertible bond compare to a non-convertible bond of equal quality?

It is normally lower.

Why are convertible bonds more volatile than non-convertible bonds?

Because their value is tied to the market value of common stock, which fluctuates more.

What is refunding bonds?

Issuing new bonds to retire outstanding bonds, usually when interest rates decline.

Callable Bond

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

Call Provision

Specifies when a bond may be called and at what price.

Call Protection

Period during which a bond cannot be called by the issuer.

Call Premium

Extra amount paid above par value when a bond is called, along with accrued interest.

Notice of Call

Notification from issuer to investors of the redemption date.

Partial Call

When only part of a bond issue is redeemed; bonds are selected randomly.

Convertible Bond

A bond that can be converted into shares of common stock at the option of the bondholder.

Conversion Price

Price per share at which a bond can be converted into common stock.

Refunding Bonds

New bonds issued to retire an outstanding bond issue, usually done when interest rates decline.