Question

Discuss the reasons why a corporate bond with restrictive covenants may trade at a different yield to a callable bond issued by another company

Answer 1

Callable bonds are those bonds which can be called by the company and they will have an embedded feature to the issuer as they can be called before the time and they will also have reinvestment risk associated with them, so the bond yield of these bonds will be lower in comparison to that of normal bonds because there is an advantage on the part of the Issuer.

Corporate Bond with restrictive covenants would be more preferred and will have a high bond yield in comparison to that of callable bonds because these corporate bonds with debt covenants are not callable in nature and they are not having the risk of reinvestment.

So, it can be said that these are the reasons because of their different in the riskiness and difference in the additional feature like callability as well as reinvestment risk, these bonds are differently priced