Callable Bond

  

A callable bond can be called in early. That means the issuer has the right to redeem the bond before its maturity date. You might buy a bond that promises to pay 9% for 30 years, but the fine print makes the bond callable in three years at 102 cents on the dollar. This means the company could pay you off sooner and you won't receive the full interest you expected to get over the full life of the bond.

Having the ability to call a bond protects the issuer in case interest rates drop a lot. If that happens, they can call in their bonds and issue new ones at lower rates.

Related or Semi-related Video

Finance: What is Forced Conversion?59 Views

00:00

Finance allah shmoop what is forced conversion Okay this is

00:08

forced conversion Yeah this is also forced conversion and so's

00:14

this Yeah that is the issuer of this particular bond

00:19

Like the company who borrowed money has the right as

00:22

described in the indenture to force you to convert the

00:25

bond either into and say twenty five shares of common

00:28

stock or something else Which sort of implies that a

00:31

stock price the over under price of breaking evens about

00:34

forty bucks a share takes you get that thousand dollars

00:37

divided by the twenty five shares Think it's you forty

00:39

bucks a share or the issuer or company who sold

00:43

the bond in the first place can simply call the

00:45

bond and force converted into cash for the small conversion

00:49

premium of ah two point five percent or that's twenty

00:52

five bucks in this thousand dollars par value bond So

00:57

in this sense essentially the break even Numbers actually 41

01:00

dollars a share not forty there because you get an

01:03

extra little premium bump there if they force you to

01:05

convert the bond or debt into equity Got it We'll

01:08

force conversion in a bond sense is usually something cos

01:12

do when they can either refinance the bond at cheaper

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interest rates or are doing so well operationally that they

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have enough cash Teo just retire their debt They call

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it back They buy it back save the interest charges

01:24

and quick cash toe work doing something else Either way

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it's usually weigh less painful than the other flavour of 00:01:30.926 --> [endTime] forced conversion

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