Laddering for example is the practice of buying bonds

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Unformatted text preview: nd issued in 2000 and maturing in 2020. The indenture might stipulate that XYZ Company may call the bond in the second, fourth, and tenth year. 37 37 Characteristics of Bond The indenture also sets forth the call price, which is what the issuer must pay to redeem the bond. In our example, the indenture might say, The XYZ bond due June 1, 2020, is callable on June 1, 2004, at a price of 105% of par. (The indenture typically provides a table of call dates and prices as well.) Note that the call price is normally higher than the face value of the bond, but it decreases the closer the bond is to maturity. For example, XYZ Company is offering 105% of fv if it calls the bond after four years, but it may only offer 102% if it calls the bond in ten years, when it is closer to maturity. The difference between the face value and the call price is called the call premium. In our example, the call premium is 5% in 2004. In many cases, the call premium is equal to one year's interest if the bond is called in the first year. 38 38 Characteristics of Bond Call provisions considerably alter bond analysis because...
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This note was uploaded on 02/11/2014 for the course FIN 102 taught by Professor Han during the Fall '11 term at Kazakhstan Institute of Management, Economics and Strategic Research.

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