Regarding callable and putable bonds… If interest rates fall, the issuer will call bonds and if interest rates rise, the bondholder will put bonds. I am not sure of how much correspoding call price/put price the issuer/the bondholder will act? I think that call prices must be above price at issuance and put prices must be below price at issuance. How about you all? Thanks.
I am simply a student myself, please don’t take my opinion here as final, but I think there is another complexity to consider here too. Price of Callable Bond = Price of Non callable - Price of Call. As the price goes up, i.e. rates fall the price appreciation will slow down for the callable bond hence the negative convexiety of the P/Y curve at the low interest rate end. Given the price compression at high yields the text leads me to believe the price may never reach that amount. But yet the interest rates may have dropped to a level much below the coupon on the bond, and therefore to issue new cheaper (in terms of rate) debt the issuer may call the bond. Again to summarise: (1) Because of the price compression from negative convexiety at a certain yield much lower than the coupon the price may not have gone up so much yet the lower rate will result in the issuer exercising the call. Vice Versa for put. Any one else for a comment?
^ That’s all correct A few points: a) Call and put Prices can be anywhere. A bond is usually callable or puttable either on or after particular dates. Thus, the bond could be callable “at par after 10/1/2011” or “at 101 (or 98) on the following dates” b) Bonds can be called for reasons other than interest rates. For example, a bond might be called because the company needs to issue new debt and the existing debt causes a problem with seniority of the new debt. c) Bonds sometimes don’t get called even when it would be advantageous to call them. I know a guy who makes good money buying munis that should be called but Bubba in Alabama doesn’t care.
Agree with Joey and add my thought. Call price can be anywhere if it depends on the reasons for the call. In addition, it is also depends on coupon rates. If coupon rates is high enough to compensate the bondholder for interest rates risk, call price may be less than price at issuance. Do you think so? In real world, call price is fixed and based on inception of contract or it is option of the issuer at any time? Could you share the reason the issuer doesn’t call when it take benefit for them and the bondholder doesn’t care if bonds get called? 
Thank you for your share!
If a bond is callable at 98 then the whole world would just price it like it was a premium bond (unless there were some unusual conditions that had to be met to call the bond). I would have to think about whether the accounting/tax treatment would make that a good move very often. Call price is fixed when the bond is issued. The call price can’t be an option of the issuer or people would caall their bonds at 0. A bond doesn’t get called when it should because: a) Someone is too lazy to do it b) Someone is too stupid to do it c) There is risk in refinancing so that paying too much is worth the risk d) The difference isn’t worth the aggravation e) Calling a bond causes some cap structure issue. etc.