Guys, what is the affect of interest rate rise on the callable bonds? - Thanks.
Bonds would be called off, if the Interest Rate decrease, so that the bondissuer can refinance at a lower prevaling market interest rate. But when the Interest Rates are high, chances of the bond getting called-off are pretty low. - Dinesh S
Also, the value of a call option increases as interest rates fall and vice versa.
Interest rate rising, price is lower, the call holder will have no advantage to call the bond
ancientmtk Wrote: ------------------------------------------------------- > Interest rate rising, price is lower, the call > holder will have no advantage to call the bond …because they wouldn’t wanna issue a bond at a higher coupon rate
Hey Guys, Does a call feature increase duration? I personnally, think the question is YES. Correct me if I am wrong. Thanks a lot.
malek Wrote: ------------------------------------------------------- > Hey Guys, > > Does a call feature increase duration? > > I personnally, think the question is YES. > > Correct me if I am wrong. > Thanks a lot. I would say no because the bond will potentially be outstanding for a shorter period of time. correct me if im wrong
Callable Bonds demonstrates negative convexity and low duration at lower yields… - Dinesh S
My understanding is that adding either a call or put option to a bond would decrease the duration.
Indeed, Call features decrease duration!! Thanks Guys!!
how do the interest rate on the bond relate to coupon rate? If market interest rate goes down, YTM goes down, therefore price of bond is higher. The issuer will the call the bond, reissue it at a new market rate (lower than before) for both YTM and coupon rate? Im kind of lost to how issuer benefit callable bonds and what components of the bond are effected by changing market interest rate.
ancientmtk Wrote: ------------------------------------------------------- > how do the interest rate on the bond relate to > coupon rate? > The coupon rate of the bond is set at issuance. If we assume that the bond is selling for par (means that at maturity I get $100 back for every $100 I put in) then the coupon rate is the current risk free rate for a bond of the same maturity (think Treasury bonds) plus a spread that is needed to get people to buy it. The spread is determined by credit, liquidity, optionality of the bond, tax issues, seniority, and a billion other things. > > If market interest rate goes down, YTM goes down, > therefore price of bond is higher. If market interest rate goes down, the PV of all those coupon payments and principal payment goes up which causes the price to go up thus ytm goes down. > The issuer > will the call the bond, reissue it at a new market > rate (lower than before) for both YTM and coupon > rate? > The issuer calls the bond but that means that bond is gone and dead. You get paid back you principal, cya friend, thx for the loan. If they need to, they might issue new debt but it has no relationship to the called debt. Presumably the new debt will be at a lower interest rate so it will cost the company less. > Im kind of lost to how issuer benefit callable > bonds and what components of the bond are effected > by changing market interest rate. Issuers benefit becausse when interest rates go down, they can refinance at a lower rate by calling and issuig new debt. A callable bond is just like your home mortgage. When interest rates go down, you thank your bank and shop for a new mortgage