Fixed Income Investments - Provisions for Redeeming Bonds
The provisions for redeeming bonds are found in the indenture. They can be:
3.Have Prepayment Options and/or
4.Sinking Fund Provisions
1. Call Redemption
By adding a call feature in the indenture, a bond becomes a callable bond. A callable bond gives the issuer the right to redeem the bonds on a stated date or a schedule of dates before the stated maturity date for the bonds arrives.
Let's look at callable bonds in a little more detail. First, some terminology:
- Call Price - This is the price that the issuer will pay the bondholder; also know as the redemption price.
- Call Date - This is the date or dates that the issuer can call the bond from the holders.
- Deferred Call - When a callable bond is originally issued, it is said to have a deferred call of so many years up to the first call date, which is the first day the bond can be called by the issuer.
- Regular or General Redemption Prices - These price tend to be above par until the first par call date. The price is typically known before the redemption occurs.
- Special Prices - These occur because of certain events such as sinking funds, repossessions, forced sales, and eminent domain. These usually occur at par value but could be less, depending on the collateral backing the bonds.
When callable bonds are called, it can be for the entire issue or for just a part of it. A partial call can be done on a random basis, like picking numbers out of a hat, or on a pro rata basis. A pro rata call allows all holders to redeem a certain percentage of their holdings while with a random, partial call it could be anyone's guess as to which bonds will be called by the issuer.
Price can be determined as a fixed price, regardless of dates, based on a predetermined schedule of dates in which price decreases as it nears the bond's maturity date, as well as through a make whole call.
Example: Call Redemption
Let's use the Stone and Co 12's of 20, or Stone and Co 12% bonds of 2020 to illustrate a scheduled call.
Fixed price regardless of date:
This call provision allows the bond to be called at par plus interest at any date past Jan.1, 2010.
Price based on Schedule.
This call provision bases its price on stated dates with the price decreasing as the bond nears maturity.
Jan 1. 2010 Price = 103 or $1,030 based on a par value of 100
Jan 1. 2012 Price = 102 or $1,020 based on a par value of 100
Jan 1. 2015 Price = 101.5 or $1,015 based on a par value of 100
Price based on a Make-Whole Premium
This structure incorporates various formulas that can be structured to develop the price. The formula is structured to protect the yield the investor had been receiving on his bond.
Financial AdvisorsObtain valuable tips and helpful study instructions that can help you pass the Level 1 Chartered Financial Analyst exam on your first attempt.
Financial AdvisorsLearn techniques for emphasizing your CFA Level I status in the Skills and Certifications or Professional Development section of your resume.
ProfessionalsLearn how to prepare for a career as an investment analyst, and read more about how many professionals in the field progress during their careers.
ProfessionalsFind out how the CAIA and CFA designations differ, including which professionals should seek either title based on their career ambitions.
ProfessionalsChapter 1: Equity Valuation: Its Applications and Processes Chapter 2: Return Concepts for Equity Valuation Chapter 3: Industry Analysis With Porter's 5 Forces
ProfessionalsThe Chartered Financial Analyst Level III exam, which is only offered in June, is the last in the series of three tests that CFA candidates must pass.
ProfessionalsBecoming a chartered financial analyst requires the passing of three grueling exams covering an array of topics.
Options & FuturesWe decode the meaning of the many letters that can follow the names of financial professionals.
ProfessionalsPrepare to ace the CFA Level 1 exam by studying systematically.
Personal FinanceMany advisors display similar skillsets that can make distinguishing between them difficult. The following guidelines can help you better understand their qualifications and services.
Professionals who help individuals manage their finances by providing ...
Formerly known as the Association for Investment Management and ...
A financial professional who studies various industries and companies, ...
A professional designation given by the CFA Institute (formerly ...
The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>
According to the CFA Institute, a person who holds a CFA charter is not a chartered financial analyst. The CFA Institute ... Read Full Answer >>
The types of positions that a Chartered Financial Analyst (CFA) is likely to hold include any position that deals with large ... Read Full Answer >>
Prepaid expenses benefit both businesses and individuals. Prepaid expenses are the types of expenses that are bought or paid ... Read Full Answer >>
If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ... Read Full Answer >>
You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ... Read Full Answer >>