- Bonds are a major source of financing for corporations and government.
A bond is a long term contract under which a borrower agrees to make payments of interest and principal on specific dates to the holders of the bond.
-Contains a call provision and convertible features.
Most corporate bonds contain a call provision which gives the insuring corporation the right to
call the bonds for redemption. The call provision generally states that are called some other types
of bonds have convertible features. A convertible bond is a debt instrument that is convertible
in to shares of common stock at a fixed price at the option of the bond whereas a convertible
features on a bond benefits the bondholders.
- High interest in payment- A callable bond will generally require a higher interest payment than non callable bond because the investor will not be willing to buy a callable bond unless he receivers a better interest payment. When the market price of the bond of increases or equivalently, the market interest rate decreases, the issuer of the bond will call the bond and issue a new bond at a lower interest rate. This puts the buyer of the bond at a disadvantage because when the bond gets attractive it will be taken away from the investor.
- A convertible feature on a bond-A convertible feature on a bond as stated before, benefits the bondholders. Thus investors would
generally require the issuing corporation a higher interest payment on non convertible bonds than
convertible bonds. The holders of convertible bonds have the option to convert these bonds to common stock any time they choose. Typically, the bonds are exchanged for specified number of
common shares with no cash payment required. Because convertible have this option, they
require a lower payment than non-convertibles..
NatalieR answered the question on February 9, 2022 at 08:07