why
refinance at a lower rate.
why would u want to refinance your mortgage
company refinance when rates down, it lowers their interest exp. boom tip: callable bonds are negative convext and are called when rates fall…volatility will make the price of CB fall, even though the CB has an option attached to it, the call option per se increases, but the net effect is a lower CB value recall: CBond = NonCB - call option also when rates fall, price of CB will go up BUT NOT as much as a plain bond. know this.
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Company call the bond when intrest rates are down because they want to refinance at the lower rate therfore Callable bond have call risk and are valued less than Non Callable Bond. Callable Bond - Deterimental to Bond Holder Non Callable Bond - Deterimental to Bond issuer. One important difference you must remember btw Non Callable and Non Refundable Bond that Non Callable bond cannot be called any time before bond maturity However Non Refundable bond can be called only if the money used to refund is not used by issuing new bond at lower intrest rate. (This is not part of ur questions, I just want to raise it as it confused me a lot)
Its also helps if you think of it this way- Interest rate goes up -> advantageous for the bondholder to get out of the lower interest bond and invest money somewhere else for a higher interest Interest rate goes down-> advantageous for the issuer (debt seeker) to get of the bond and seek debt at a lower interest.