Call Risk

  

A call risk is the risk that the issuer of your bond will redeem it (a process known as "calling") before its maturity. If this happens, you could lose out because you didn't get all the interest you had expected.

You were supposed to get an 8% coupon for 10 years. But after two years, the bond is called. You lose eight years of profits from the bond. Meanwhile, you could have sold the bond if interest rates went down, making your 8% more attractive to other investors. If a bond is called, you lose out on the chance to sell that bond at a profit.

The call risk measures the possibility that the issuer might go through this process. It takes into account a) whether the bond is callable, b) the process needed to call it (what restrictions the issuer has), and c) the relationship between prevailing interest rates and the interest rates you are getting on the bond. So if a bond is callable and there are very few restrictions on the issuers ability to call it and the interest rates you are getting on the bond are much higher than the current prevailing rates (so it would be in the issuer's interest to call the bond and issue a new set at a lower rate), then the call risk is very high.

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Finance: What is Forced Conversion?58 Views

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Finance allah shmoop what is forced conversion Okay this is

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forced conversion Yeah this is also forced conversion and so's

00:14

this Yeah that is the issuer of this particular bond

00:19

Like the company who borrowed money has the right as

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described in the indenture to force you to convert the

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bond either into and say twenty five shares of common

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stock or something else Which sort of implies that a

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stock price the over under price of breaking evens about

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forty bucks a share takes you get that thousand dollars

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divided by the twenty five shares Think it's you forty

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bucks a share or the issuer or company who sold

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the bond in the first place can simply call the

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bond and force converted into cash for the small conversion

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premium of ah two point five percent or that's twenty

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five bucks in this thousand dollars par value bond So

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in this sense essentially the break even Numbers actually 41

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dollars a share not forty there because you get an

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extra little premium bump there if they force you to

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convert the bond or debt into equity Got it We'll

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force conversion in a bond sense is usually something cos

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do when they can either refinance the bond at cheaper

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interest rates or are doing so well operationally that they

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have enough cash Teo just retire their debt They call

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it back They buy it back save the interest charges

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and quick cash toe work doing something else Either way

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it's usually weigh less painful than the other flavour of 00:01:30.926 --> [endTime] forced conversion

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