Convertible Bond Vs. Callable Bond

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A convertible bond allows the holder to exchange the debt instrument into a specified number of common shares of the issuing corporation. A callable bond is a debt obligation that permits the corporation to redeem the bonds, at its election, prior to the specified maturity date.

Call Provision

  • In a declining interest rate environment, a corporation can reduce its interest costs by redeeming previously issued bonds prior to their original maturity or due date and reissuing them a lower interest rate.

Call Protection

  • Some callable bonds provide call protection to investors whereby the corporation cannot redeem the bonds prior to a specified future date.

Call Premium

  • In some cases, a corporation must pay its callable bondholders a premium if they exercise the right to call the bonds prior to the original maturity date.

Hybrid Nature

  • Convertible bonds allow the holder to receive an annual interest rate plus the privilege of converting, at some future time, the debt instrument into a specified equity position of the business.

Interest Rate

  • Since the conversion privilege has a certain intrinsic value, the interest or coupon rate payable on convertible bonds is usually lower than that payable by bonds which afford no conversion feature.

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