Callability, Financial Management

It is a feature that allows the issuer to redeem its bonds before maturity. Almost all convertible bonds come with this feature. Due to this feature, bonds carry a risk, known as call risk. Normally, the call feature is differed for certain years. For instance, if a company issued 10 year callable bonds with a 4 year deferred period, it means the company can not use the call option before 4 years.

When the conversion value of the convertible bond goes up over the present call price, the company may call the bonds. This act of the company presents an investor with two choices: return the convertible bonds for the call price or convert the bonds into equity shares. If the conversion value is greater than the call price, a rational investor will choose to convert the bond. This is also in the interest of the issuing company, since the company does not desire to incur any cash flow to redeem the bonds.

Posted Date: 9/8/2012 6:15:54 AM | Location : United States

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