A feature of a convertible issue that allows the issuer to call the issue during the non-call period if the stock reaches a certain price. |||For example, a convertible bond may allow a provisional call if the underlying common stock trades at 150% of the conversion price for 30 consecutive days.
A sizeable decline in interest rates that may trigger or cause companies to call in bonds that otherwise pay high coupon or interest rates. Because these bonds are being called before their initial expiration date, theoretically, bondholders can expect to receive a premium or additional sum for their securities. |||As an example, if a company that issues bonds containing a coupon or interest rate of 12% was to see the prevailing interest rate to drop to 7%, it may exercise its option to "call", or buy back these bonds from the debt holders, enabling the company to borrow money at a much lower rate than when the security was first issued. The company, however, must pay bondholders a premium, or an additional amount over and above the bond’s par value in order to repurchase the debt. The fluctuation in interest rates acted as the trigger for such an action.
A type of interest rate risk which asserts that the characteristics of interest rate fluctuation are variable (as opposed to constant) over a period of time. Although interest rates are expected to fluctuate over the period of an investment, the probability of an interest rate change is not always constant, nor is the magnitude of the volatility of interest rate changes. |||Generally speaking, it is impossible to predict with certainty the characteristics of a changing variable such as interests rates into the future. While it is possible to make reasonably accurate predictions, some amount of uncertainty still exits. This uncertainty represents a tangible risk, which must be incorporated into the price of an investment vehicle.
Refers to a series EE savings bond which has been issued after December 1989 and purchased by an individual at least 24 years of age. |||The interest from this type of bond is tax-free if you redeem it to pay for a higher education expense.
A condition that allows a bondholder to resell a bond back to the issuer at a price - which is generally par - on certain stipulated dates prior to maturity. The put provision is an added degree of security for the bondholder, since it establishes a floor price for the bond. This mitigates the risk of a decline in the bond price in the event of adverse developments such as rising interest rates or a deterioration in the credit quality of the bond issuer. |||Since a put provision gives the bondholder the right but not the obligation to sell or "put" the bond to the issuer, it is akin to the sale of a put option by the bond issuer to the bondholder. As a result, a bond with a put provision will generally be priced higher than a comparable bond without a put provision.
A bond that allows the holder to force the issuer to repurchase the security at specified dates before maturity. The repurchase price is set at the time of issue, and is usually par value. |||Bondholders have the option of putting bonds back to the issuer either once during the lifetime of the bond (known as a one-time put bond), or on a number of different dates. Of course, the special advantages of put bonds mean that some yield must be sacrificed. This type of bond is also known as a multimaturity bond, an option tender bond, a variable rate demand obligation (VRDO).
A transaction in which bonds with lower yields are swapped for bonds with higher yields. |||Pure yield pickup swaps are usually a risky investment strategy. Investors using this strategy expose themselves to higher interest rate risk since higher yielding bonds will have a longer term to maturity. In addition, high yielding bonds are usually of lower credit quality, thereby exposing the investor to higher default risk.
A type of security that pays no income until maturity; upon expiration, the holder receives the face value of the instrument. The instrument is originally sold for less than its face value (at a discount). |||Pure discount instruments can take the form of zero-coupon bonds or Treasury bills.An example of a pure discount instrument could be a bond with a face value of $100. Its time to maturity is two years and it is currently selling for $85. If the investor holds this bond to maturity, he or she will earn a yield of 8.47% ( (100/85)^(1/2) ).
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