Question

1. Why would the issuer wish to repay the bond prior to its original maturity date?

2. What types of "callable bonds" can you encounter in your personal life?

Answer 1

1. At times the market interest rate declines much below the coupon rate offered by the bond which is already been issued

In this scenario it is beneficial for the issuer to recall the bonds and re-issue new bonds at a lower coupon rate.

2. Callable bonds are of two types Step Up bonds and accrual bonds. In a callable step up Bond the coupon paid by the bond will increase if the debt is not called back by the issuer. In accrual bonds the interest rate on the accrual bond remains fixed but the interest accrues at a consistent rate over time and the investors do not require coupon payments until the bond is called or matured.