Call And Put Features

Question 1

Callable bond

Answer 1

A bond where the issuer has the right to redeem the bond at a predetermined price (above par) prior to maturity. These bonds have higher coupon. They are likely to be called when interest rates drop. There may be an initial protection period during which a bond cannot be called. There may be different call dates with different call premiums for the life of the bond

Question 2

Call penalty

Answer 2

The cost to the issuer of issuing a callable bond i.e. higher coupon and final payment above par

Question 3

Call premium

Answer 3

From investor point of view this is the increase over par they receive if a bond is called

Question 4

Yield To Call

Answer 4

Indicates how a call impacts the return on a callable bond

Question 5

Yield To Worst

Answer 5

The lesser of YTM and YTC i.e. worst potential return

Question 6

Puttable Bond

Answer 6

The investor has the option to sell the bond back to the investor after a specified period at a specified price (usually par). It is also called a tender option. They have lower coupon rates. The investor is likely to exercise this option if interest rates go up (so prices go down) and get a better price (at par) and re-invest in higher coupon bond

Question 7

Put option floor

Answer 7

Interest rates rise - prices fall - sets floor for market price of bond
Think falling to floor (based on price)

Question 8

Interest rate moves and callable/puttable bnds

Answer 8

Fall - call
Rise - put