From the course: Applied Fixed Income

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Callables and putables: Payouts and issuer

Callables and putables: Payouts and issuer

From the course: Applied Fixed Income

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Callables and putables: Payouts and issuer

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- [Instructor] Thinking about these rate options now, when looking at callable bonds, it is most beneficial to a bond issuer if interest rates fall. In that case, the issuer may redeem that bond and issue a new bond with lower coupon rates. On the other hand, callable bonds mean higher risk for investors. If the bonds are redeemed, the investors lose some future interest payments. This is known as refinancing risk. Investors will also run the risk of less price appreciation when rates go lower, as that means the likelihood of the bond being called away is higher. So a callable will trade at a price below a straight bond. We'll look at that in more detail when we look at the convexity of a callable bond. When we look at putable bonds, it's most beneficial to a bond investor if interest rates rise. In that case, the investor may put the bond back to the issuer and purchase a new bond with higher coupon rates. On the flip side, putable bonds mean a higher risk for the issuer who runs the…

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