# Callable Bonds

Can anyone explain to me why if the call price increases (decreases), the value of the callable bond will decrease (increase)?

If the call price increases, it would require an even higher actual price to have the call option executed, meaning the embedded option would be decreased in value? If value of callable bond=value of straight bond - value of embedded option, then the value of callable bond would increase instead of decreasing?

Let me know if my thinking logic is correct.

Thanks!

The call favours the issuer (borrower) not the investor. So for example if rates drop, the issuer can call back the bond, get back his money and then re finance at lower rates (paying lower coupons).

As a result you can look at this as the investor (the bondholder) being long the bond and short the call option. Therefore from the investor perspective, the call decreases the value of the bond.

Bond = SB - Call option

Bond = SB + Put option.

(Why does put increase? Because this option benefits the investor. He can put back the bond when the rates increase, re finance and then receive higer rates from someone else. Because this benefits the investor he must pay a premium for it. Because the call benefits the issuer, there is a discount on it)

Hi,

I understand the impact of the change of interest rates on callable bonds. However, I still don’t understand how call price would be relevant to the change of rates? Is call price the same as the exercise price?

Thanks!

Hi,

I understand the impact of the change of interest rates on callable bonds. However, I still don’t understand how call price would be relevant to the change of rates? Is call price the same as the exercise price?

Thanks!

Is it the value of the callable option or value of callable bond ? could you post where you got this statement from? I will give a quick and completely hypothetical example let’s say for a 5% interest rate bond, the price is 102 and can be exercised at 103 when interest rate is 4%, if the call price increases to 104 it will take interest rate to drop till 3 % and cannot be exercised when its 4%

This benefits the investor and hence the callable bond should increase right? and the callable option(component which is subtracted from the value of straight bond ) should decrease

Tell me if i am wrong

The call price is a pre-set (exercise price) by the issuer. so the call price is irrelevant to the change of rates

It will be less likely that the current price reach “the call price(exercise price), if it is high enough” and as a result the value of the call option will decrease and Value of the callable bond will increase (i.e. it will become more appealing for investors to buy it"