E15 Callable Bonds Flashcards
1
Q
what is a callable bond?
A
A callable bond can be redeemed at the bond issuer’s option
before maturity.
2
Q
what is a call price?
A
price paid by bond issuer to redeem before maturity
3
Q
how to find the price of a callable bond?
A
P = C + (Fr - Ci) a angle n
If Fr -Ci is negative, then minimum price occurs at latest
redemption time.
If Fr - Ci is positive, then minimum price occurs at earliest
redemption tim
4
Q
why issue callable bonds?
A
Callable bonds offer higher yields to compensate for reinvestment risk
When interest rates fall bond issuer can call bonds and issue new bonds at a lower yield rate.
