Is convertible normally callable? Why?
no
A regular convertible isn’t a callable bond. Since that call belongs to the issuer. A convertible is just a regular bond with a regular equity call option attached to it (since the option has to be ‘bought’ the bond will have a lower coupon rate than a real regular bond). However, when you look at convertibles issues in the real world (non-CFA) most have callable features, at least those I have seen. But for CFA: No, not callable in the way you think it is.
CFAI book Vol 5, page 300, seem to indicate yes… In the real world, did you see more convertible bonds have call option than non-conv bonds?
I think so, they are usually callable.
normally - yes but not necessarily
The book says that almost all convertable bonds are callable, but some are even putable.
They add a lot of things in the real world. I have even seen call futures related to the iTraxx indices. When some spread was above 200bps for sometime the issues had the option to call the convertible bond on top of the regular “If stock is above x for y days it can be called”. Pricing that kinda sucks. In the questions I have seen regarding convertible bonds a callable feature was never present or never important. Most things were about calculating the conversion price etc.
Guys,
If the bond is callable by issuer - then the investor get cash (straight value) or common stocks ?
If common stocks, at conversion price or market price ?
Reference:
CFAI BOOK, reading 50, question 24 B.
Pitmaster1,
in the real world most convertible bonds will have a call feature for the issuer which kicks in typically after 3 years, when the parity value (think underlying equity value) trades above 130% of par for a set number of days.
The reason they call the bond is to force the bondholders to exercise their conversion option - otherwise they would just get par back for the bonds. By converting they are getting the stock which is worth 130%.
It has the effect of removing the debt the company.
Pitmaster1,
in the real world most convertible bonds will have a call feature for the issuer which kicks in typically after 3 years, when the parity value (think underlying equity value) trades above 130% of par for a set number of days.
The reason they call the bond is to force the bondholders to exercise their conversion option - otherwise they would just get par back for the bonds. By converting they are getting the stock which is worth 130%.
It has the effect of removing the debt the company.