Home     About Us    Contact Us     Contribute     Privacy
Investing
Stocks
Bonds
Mutual Funds
Biz
Credit
Career
College
Economics
Tax
More
 
 
Marketplace
Related Articles
Related Definitions
Related Categories
Tip of the Day

Tip of the Day Your Career Is Your Most Valuable Asset

Your Career Is Your Most Valuable Asset - Building a career should take the highest precedent in your life. You will never have another investment that can...

read entire tip

Related Podcasts
Recently Added
Other Great Sites
 

Callable Bond Pricing

A callable bond is one which the issuing company can call, or pay off, before the bond's actual maturity, or due date. This benefits the company rather than the bond holder. For instance, if the issuing company has issued bonds that are paying 6% interest, but then the economy starts to decline and banks start offering loans for 4%, the company can refinance and pay a lower interest rate. They do this by calling in their original 6% bonds and paying them off at their face value before they reach full maturity, thereby not having to pay interest on them any longer. Most companies pay off their callable bonds at a higher price than their actual face value in order to compensate the investor for lost future earnings. The companies are then free to issue new bonds at a lower rate, or take a loan from a bank at a lower rate. This can be a problem for the bond holder because if the bond holder was counting on the 6% interest rate payment for the life of the bond, when the bond is paid back early, he'll get no subsequent interest payments. He can, of course, re-invest the money, but it is unlikely that he'll receive a high interest rate from any other bond issuer if the general interest rates are falling.

For most entry-level investors, callable bonds may be too complex to consider buying because the prices of callable bonds in the secondary markets move differently from the prices of other bonds. For example, when interest rates fall most bond prices rise, but callable bond prices actually fall as interest rates fall, which is a phenomenon called price compression.

Callable bonds have some good points such as they pay higher interest rates that normal bonds pay in order to compensate for the additional risk. An experienced investor can analyze the economy and decide if he thinks that the current interest rates will decline or increase. If it seems they will increase, then callable bonds have very little chance of being called. But if the economy looks poised to decline and interest rates fall, then callable bonds are not a very secure investment.

Discuss It!

golden age cheese said:

I do have a serious doubt regarding Callable Bonds. What if the company pays off the bonds at a lower rate than the actual face value, citing some financial crisis or something? How will be the stock holder be compensated on such situations?

192.168.1.1|192.168.1.1|192.168.1.1|192.168.1.1 said:

if the economy looks poised to decline and interest rates fall, then callable bonds are not a very secure investment.

http://celebritynetworths.org/celebrity-net-worth/athletes/ said:

I am trusting a similar best work from you later on as well.I just got to this stunning site starting late.

mcintosh for sale said:

Helpful data convincingly whatever is left of the part My associate and i battle with such unpretentious segments considerably.

bestessay said:

What if the company pays off the bonds at a lower rate than the actual face value, citing some financial crisis or something? How will be the stock holder be compensated on such situations?

veterans aid and attendance springfield mo said:

I think the callable bonds are more benefitting the company rather than the bond holder. It gives more preference for the company as it offers an opportunity for them to call the bond before maturity period itself. Thanks for sharing the details.

academic writer service said:

What if the company pays off the bonds at a lower rate than the actual face value, citing some financial crisis or something? How will be the stock holder be compensated on such situations?

Most Popular Articles
Most Popular Definitions
 
Daily Definition

Definition of the Day Minority Ownership

Minority Ownership - Minority Ownership is less than fifty percent ownership of a corporation voting stock, or not enough ownership to control the company operations. From a purely accounting point of view, parent company which owns less than one hundred percent, but more than fifty percent of a subsidiary presents...

read entire definition

 
 

 

 

Home     About Us    Contact Us     Contribute     Sitemap

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Copyright © 2009 TeenAnalyst.com