41 41 characteristicsofbondsf

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Unformatted text preview: they add two dimensions of risk to bondholders. First, they present reinvestment risk. When interest rates fall, the bond issuer is more likely to exercise the call provision in order to retire what has become high­interest debt and reissue the debt at the prevailing lower rate. This leaves the investor with cash that must be reinvested in a lower interest rate environment. Second, call provisions limit a bond's potential price appreciation because when interest rates fall, the price of a callable bond will not go any higher than its call price. Thus, the true yield of a callable bond at any given price is usually lower than its yield to maturity. A bond call will almost always favor the issuer over the investor; if it doesn't, the issuer will simply continue to make the current interest payments and keep the debt active. 39 39 Characteristics of Bond You can employ certain bond strategies to help you protect your portfolio from call risk. Laddering, for example, is the practice of buying bonds with different maturity dates. If you have a laddered portfolio and some of your bonds are called, your other bonds...
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