Callable Bonds

[lawman]

If I buy a callable bond and the bond is called am I guaranteed to get my principal back or can it be redeemed for less than I paid causing me to lose money?

 

[aja8888]

If I buy a callable bond and the bond is called am I guaranteed to get my principal back or can it be redeemed for less than I paid causing me to lose money?

You will get the stated value if the bond. If you bought a $10,000 bond and it is called, you will get $10,000 and any accumulated dividends.

 

[lawman]

You will get the stated value if the bond. If you bought a $10,000 bond and it is called, you will get $10,000 and any accumulated dividends.

So if i paid $1100.00 for a $1000.00 bond and it is called soon after buying it I would lose $100.00.....correct??

 

[Freedom56]

So if i paid $1100.00 for a $1000.00 bond and it is called soon after buying it I would lose $100.00.....correct??

Yes in most cases you lose $100.

However, some not all callable bonds have provisions such as "make-whole call". A make-whole call provision is a type of call provision on a bond allowing the issuer to pay off remaining debt early. The issuer typically has to make a lump-sum payment to the investor. The payment is derived from a formula based on the net present value (NPV) of previously scheduled coupon payments and the principal that the investor would have received. This sometimes helps offset the capital loss if you buy a callable bond with this provision over par value.

 

[lawman]

Yes in most cases you lose $100.

However, some not all callable bonds have provisions such as "make-whole call". A make-whole call provision is a type of call provision on a bond allowing the issuer to pay off remaining debt early. The issuer typically has to make a lump-sum payment to the investor. The payment is derived from a formula based on the net present value (NPV) of previously scheduled coupon payments and the principal that the investor would have received. This sometimes helps offset the capital loss if you buy a callable bond with this provision over par value.

Except for default is there ever a time when a bondholder would collect LESS than the yield to worst?

 

[Freedom56]

Except for default is there ever a time when a bondholder would collect LESS than the yield to worst?

If the bond holder sells below par or the price they purchased the bond for before maturity or there is a tender offer for bonds before maturity and the bond holder accepts the offer they would collect less than the yield to worst. In both cases the bond holder is choosing to sell before maturity.

There are so many investment grade low coupon bonds trading well below par that some companies who have the cash can take advantage of the situation make tender offers higher than the current market price but below par and realize a gain from the buyback from those bond holders who tender their bonds. It's not that different from companies buying back stock when prices are depressed. However with the cost of capital rising (i.e. rates going up), this is less likely to happen.