A bond is a letter of evidence that the issuer has to a certain investor or institution. So another name for this instrument is debt. The same is true for any debt you give to a friend or relative. Bonds also have maturity dates. This deadline is often referred to as the due date.
that day card issuer Or the borrower is obliged to pay the debt. However, the borrower can pay the debt before that date. Good bonds paid early are called bonds. callable bond.
Definition of Callable Bond
Callable bonds are a type of bond that the borrower’s issuer can repay before the maturity date. The opposite of callable bonds are non-callable bonds, or bonds that can only be repaid at the maturity date.
For example, Mr. Rahman bought a callable bond From PT XYZ, April 13, 2023 is the maturity date because of the shape callable bondThen PT XYZ will be able to buy back the bonds from Pak Rahman before April 13, 2023 arrives.
Callable bonds typically have a higher coupon rate. Bonds that cannot be called Its purpose is to attract investors to buy this instrument. Although there is uncertainty as to when the issuer will repurchase the issued bonds.
It is not uncommon for issuers to buy back. callable bond Issued when the underlying interest rate decreases. Therefore, companies or institutions can increase operating capital with lower interest costs.
How do callable bonds work?
Before understanding how these bonds work You have to keep in mind that bonds are one of the sources of funding for a company’s operations. In addition to bonds Companies or institutions can also raise capital from other sources, including banks.
You also need to keep in mind that when borrowing from banks or issuing bonds. The company must pay more to the bond buyer and the bank. in the case of bonds The additional funds are called coupons. while bank loan is called interest rate loan. Both bond coupons and bank loan rates are influenced by reference interest rate from financial agencies such as Bank of Indonesia The issuer’s job is to find funding sources with low interest costs.
Bank loan interest rates are infrequent. floating rate (varies with the underlying interest rate and other benchmarks). Loan interest rates are also often lower.
Bond coupons usually fMixing rate (last until maturity) for investors This gives certainty about how little they will earn. but for card issuers This will be a loss if the underlying interest rate decreases. This means that they can issue bonds at lower interest costs or borrow from banks.
The solution is the publishing company. callable bond or bonds that can be bought back before the maturity date Therefore, the issuer can buy back the bond when the underlying interest rate decreases. After that, bonds can be reissued again by reducing the coupon or borrowing money from the bank.
However, issuing these types of bonds is subject to the risk of selling poorly in the market. This can happen because investors don’t know when the issuer can buy back the bond and stop paying interest. This will certainly harm investors.
For example, a publishing company callable bond With a coupon of 6% per annum, the principal value of the loan is Rp 10,000,000 and has a term of 5 years. The potential profit that an investor will receive each year is IDR 600,000 and within 5 years he will receive a profit of IDR 3,000,000 (IDR 600,000 x 5).
However, it turns out that the company bought back the instrument in the third year. This means that the investor will only receive a profit of Rp. 1,800,000 (Rp. 600,000 x 2) from what it should have been Rs. 3,000,000 because two years later the company no longer pays the coupon. to solve this problem Issuers tend to set coupons that are higher on it. callable bond They issue compared to ordinary bonds.
Types of bonds that can be called
by page Investopedia, callable bond Bonds can be issued in various forms depending on the content of the contract. (Remember that bonds are debt instruments.) Bonds issued by local governments (municipal bonds), and many companies have While federal bonds, such as federal government bonds, generally do not.
In addition to the above two types Other types of bonds that have a “callable” clause include: Sinking Fund. Simply put Sinking Fund It is a method used by the company to pay off debt. This is usually done by buying back the bond from the investor periodically prior to the maturity date. The goal is to alleviate the burden of the company upon maturity.
callable bond Issuers can repurchase when certain events should be stated in this instrument’s prospectus. There is also callable bond which the issuer can only buy back after a certain period Therefore, you should check the prospectus of these types of bonds before formally purchasing them.
Callable Bond Pros and Cons
for investors Advantages of buying callable bond It is in a higher coupon than general bonds. The downside is that the issuer may buy back the bond in order not to maximize profit.
This loss is exacerbated by the possibility of lower coupons for other bonds when companies buy back these bonds. The reason is that new bond coupons typically decrease as the underlying interest rate decreases.
The advantage of this type of bond issue for companies is the flexibility to buy back bonds issued before the maturity date. Therefore, companies New bonds can be issued for a lower coupon fee or borrowed from a bank.
However, the disadvantage is that the issuer must offer a higher coupon when the bond is offered. The goal is to attract investors. If the underlying interest rate does not decrease or increase This may result in the company having to pay high interest on the maturity date. callable bond. Be sure before buying bonds in both the secondary and primary markets. You already know the type of instrument so that you can maximize your profits.
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