Management Notes

Reference Notes for Management

Callable Bonds – Difference between Callable and Non Callable Bonds | Investment Analysis

Callable Bonds | Difference between Callable and Non Callable Bonds | Investment Analysis

 

When the business corporation or governments are looking forward to raising capital or say borrow money on a long-term basis, they issue long-term negotiable promissory notes called bonds (Kevin Voigt, 2020). Some of the basic terms that are associated with the issuance of a bond include par value, coupon rate, and maturity period. Bond pricing is the method that is used to determine the theoretical price of a bond that an investor would be willing to pay (Scott, 2020).

 

The return on the bond can be measured using the current yield, YTM (Yield to maturity), and YTC (Yield to Call). The prices of the bond with a various required rate of return is affected by the change in the period of maturity.

 

Callable and Non-Callable Bonds

 

Callable Bonds

Non-Callable Bonds

Callable bonds are the types of bonds where the company issuing the bond has the choice to redeem or call the bond before it reaches to maturity (Laurence Booth, 2014). 

Non-Callable bonds are the types of bonds where the company issuing the bond does not hold the choice to redeem it before it reaches to maturity.

In case of callable bonds, rate of interest risk is usually higher for which investors are rewarded with a high yield.In case of non-callable bonds, rate of interest risk is lower compared to callable bonds.
Payment of interest on these types of bonds is guaranteed only till the redemption date or call date.Until the day of maturity, the payments of interest on these bonds are guaranteed.

 

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