Callable bonds

Simply question but i keep getting confuded:

For callable bonds, the call price is usually set at …to the par?

A. Discount

B. Premium

C. same as par

Usually at a premium to par.

If there are multiple calls, the earlier the call, the higher the premium. Sometimes the latest calls will be at par.

Thanks Magician. That is right…but I don’t get the intuition here. I always thought that since the bonds are callable, the issuer has to issue them at a discount to attract investors?

Read the question again…

It is asking where the call price is set.

Not the issue price of a callable bond in relation to an equivalent coupon paying bond.

Ahhh i understand. Misread the question. thanks

It doesn’t have to be at a premium to par – frankly, the call price can be anything the issuer wants – but it’s typically at a premium to par.

The call price sets a cap on the market price of a bond. When the issuer sells the bonds, they’d like to get as much money for them as possible; that’s the point of issuing bonds. If they were callable at 90, say, then the most the issuer will get when they sell them is $900/bond when par is $1,000.

When the call price is set above par it is done to afford the investor some call protection. This call protection reduces the return investors demand to invest in a companys debt; thus cheaper financing for the issuer at the expense of higher interest rate risk.

For example, an issuer issues a bond with a call price equal to par (par = 100) at a discount of 96. If the issue instead had a call price of 102, the bond could be issued at 98. (These number are just an example).

I think the price above call is to attract investors, otherwise callable bonds wont be that saleable if call price is discount to par.

I don’t believe I’ve ever encountered a bond with a call price below par (except zero coupons). Either way, bonds can be structured with whatever features the issuer desires, the market will adjust the required return accordingly and thus affect the cost of borrowing for the issuer.

If the call price was below the issue price companies would just issue at par, 100, and call them back at a discount thus realizing an instantaneous risk less profit. There wouldn’t be much of a market for these securities…

The point is . . . they _ wouldn’t _ issue them at par, because nobody would pay them par for the bonds.

They’d likely issue them for a price below the first call price.