I was asked: Is the cost of a \"callable\" bond to the buyer higher or lower tha

Question

I was asked:

Is the cost of a "callable" bond to the buyer higher or lower than if it was not "Callable"? Why?

My response is: Callable bonds are a bit more complex from an investment standpoint. Unlike a regular bond that pays interest until expiration, a callable bond that can end at its original maturity date and the other at a callable date. The call price of a bond usually exceeds the face value to make it more enticing for investors to buy. There is a benefit to the issuer in the case of a decrease in interest rates. The issuer has the advantage to borrow money at a lower rate and then pay off the higher rated return on investments. This is not desirable to investors because of the redemption of bonds.

Am I on the right track? I sthata good answer?

Explanation / Answer

Answer ) Hi Your answer is good, I got your point. here is how I would answer this question differently. I am saying the same thing in a more direct and specific pay.

A callable bond is worth less as compared to a non callable bond for the buyer because by having a call option in the bond the bondholder is not getting the additional interest payments he is supposed to get if he held the bond till maturity.

The coupon rates of callable bonds are therefore set higher as compared to non callable bond to attract investors. Due to higher coupons the callable bonds mostly trade at a premium. The issuer is at advantage because issuer can call back the bonds when interest rates in market decrease. They can refinance at a lower rate.

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