Characteristics, Uses and Taxation of Investments - Callable and Foreign Bonds and Promissory Notes

vi. Callable: a bond is callable if the issuer can retire it and issue a bond with a lower interest rate. The ability of a bond to be called is a feature that is common to corporate bonds, particularly of a lesser quality which bear a higher rate of interest. Planners should note that the purchase of a callable bond may subject the holder to reinvestment risk if the bond is called since the investor has to find a fixed income instrument of similar quality and with a comparable interest rate.

e. Foreign Bonds: these are obligations of both developed and developing foreign governments and companies.
  1. Corporate - these are the tradable obligations of foreign corporations.
  2. Sovereign - the debt of foreign governments that trades in the secondary market. Such bonds are subject to political risk and liquidity risk.
Individuals' direct investment in foreign debt is rare. Professional management through a mutual fund would enable such investment in a cost effective and risk controlled manner.
C. Promissory Notes - these are nothing more than a promise to repay a sum of money pursuant to terms established between the lender and the borrower. The structure is nearly identical to that of a bond; valuation is a function of discounting cash flows from such notes at an appropriate rate of interest. These notes are subject to similar risks as well such as reinvestment, inflation, interest rate and credit risk. Because the terms of each note are bespoke, there is no secondary market for these instruments, making liquidity risk an important consideration.

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