Why do callable bonds with low coupons have a lower probability of being called than one with a higher coupon?
Also, vice versa with high coupon putable bonds having low probability of being put?
You call a bond when you want to issue new bonds at a lower coupon and pay less interest.
If you’re already paying a low coupon, it’s less likely that you can pay a lower coupon.
You put a bond when you want to buy new bonds at a higher coupon and receive more interest.
If you’re already receiving a high coupon, it’s less likely that you can receive a higher coupon.
That makes sense, thanks a lot!
Why you base your statements in the terms of the coupons? I think a coupon does not say nothing about a bond’s yield (cost or profitability) because yield depends on the price also. So I would better say that high-yield bonds (compared with market interest rate) are more likely to be called; and low-yield bonds (compared with market interest rate) are more likely to be put.
Regards
@Harrogath s2000 magician is actually correct. The chances of a bond being called or put depend on many factors (coupon, market rate, reinvestment rate, credit risk, etc)
The initial question concerned the relation between callability/putability and the coupon rate :
From an issuer of bond point of view :
If coupon is low, it means it is cheap for you (the issuer) why would you call back the bond ? Unless you can issue a new bond at an even lower coupon.
=> The lower the coupon, the lower the chances of the bond being called (and vice versa)
From an investor point of view :
If coupon is high, why would you put back the bond ? Unless you can get your money back and invest in another bond that gives a higher coupon, right ?
=> The higher the coupon, the lower the chances of a bond being put (and vice versa)
From the issuer point of view guess the following:
5-year maturity bond, 100 USD face value with 2.0% coupon rate. Its market value now is 69.67 USD. The current market interest rate is 6.0%. Would you call the bond? I would call it blindfold. My coupon is so low and I don’t care, I call it even knowing I can’t issue a bond with a smaller coupon rate. This contradicts your rule #1, right? But why? Because the yield of this bond is 10.0%. I prefer to call it and issue a new one with 6.0% yield for a price of 83.15 USD, more money for my pocket !
From the issuer point of view guess the following:
5-year maturity bond, 100 USD face value with 20% coupon rate. Its market value now is 164.94 USD. Remember the current market interest rate is 6.0%. Would you get your bond put back? Yes you would. Look at your gigantic coupon rate and you even got ur bond put back…why? This contradicts your rule #2.
This bond has a 5.0% yield and the bond holder will put it back and with that money will buy a cheaper one which gives 6.0% yield and 20% coupon for a price of 158.97 only, more money for the investor!
This is why you look at bond yield when diciding calling or putting a bond, not at the coupon rate. and leaving other variables constant (like liquidity, IPS objectives, etc) you will decide on the yield because it is your effective cost / profit from a bond issuing / holding.
If you are not accordant with this we can go into accountability processes to make this clear further.
Regards
^ Why is the level of arrogance inversely related to the level of knowledge?
If you prove your point you won’t fall inside of what your question is intended to relate.