Early Retirement Of Bonds - Lecture notes, lecture 11 PDF

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Fall 2015 COMM 217 Section E Chapter 11 - Early retirement of bonds

 Early retirement of bonds initiated by the issuing company is available if the bond is callable or redeemable.  Due to changes in interest rates, economic or business conditions, and investment opportunities, a company may decide to retire the bonds before maturity.  Issuers tend to call bonds when interest rates fall. This is because it is cheaper for the companies to buy back the current bonds and issue new bonds at lower interest. Often, these types of bonds are retired at a price higher than face value to compensate for the risk.  Here, the risk for the investor is the chance of issuing company buying back the bonds earlier than maturity. Investors purchase bonds because you can lock in a steady stream of cash flow from coupon payments regardless of market rate. So the fact that company can repurchase the bonds anytime puts greater risk for the bond holders.  It is less common for a company to call back the bonds when the market interest rate rises. However, if they want to refinance the business by issuing more shares (equity) which requires no interest payment, then a company might decide to retire the bonds earlier than maturity, to replace them with shares....