Which feature of a bond contract allows the issuer to redeem a bond issue immediately in its entirety at an amount greater than par value prior to maturity?
Question: Which feature of a bond contract allows the issuer to redeem a bond issue immediately in its entirety at an amount greater than par value prior to maturity?
The feature of a bond contract that allows the issuer to redeem a bond issue immediately in its entirety at an amount greater than par value prior to maturity is called a call feature.
A call feature gives the issuer the option, but not the obligation, to buy back its bonds before they mature. The issuer may choose to do this if interest rates have fallen since the bonds were issued, so that it can refinance its debt at a lower cost.
When a bond is called, the issuer pays bondholders the call price, which is typically equal to par value plus a premium. The premium is paid to compensate bondholders for losing the opportunity to continue receiving interest payments on the bond.
Call features are more common in corporate bonds than in government bonds. This is because corporations are more likely to be able to benefit from falling interest rates.
Here is an example of how a call feature might work:
- A company issues a 10-year bond with a 5% coupon rate and a par value of $1,000.
- A few years later, interest rates fall, and the company can refinance its debt at a lower rate.
- The company decides to call its bonds, offering bondholders a call price of $1,100 per bond.
- Bondholders are happy to accept the call price, as it is greater than the par value of the bond.
As a result, the company is able to redeem its bonds and refinance its debt at a lower cost, saving itself money in the long run.
Rjwala is your freely Ai Social Learning Platform. here our team solve your academic problems daily.
0 Komentar
Post a Comment