Bond Prices

Bonds are not necessarily negotiated at their

par value

. They could be negotiated above or under their par value. Any bond being negotiated under $1000 is considered as a trading at a discount.

For example, Tenet Health Care bonds with a coupon rate of 6% and a maturity date for the year 2012 will be traded at a discount at $953.75 per bond, in December 19, 2004.

Bonds trading at a premium sell for more than $1000 (par value). IBM has 7 ?% bonds maturing in the year 2013 that will be traded at $1,183.75 per bond on December 19,2004. This $183.75 premium per bond is an amount investors were willing to pay in order to receive a 7 ?% coupon rate for this bond.

Call provision: Call provisions allow the issuer of the bonds to re-buy such bonds at a fixed price before the date of maturity. Many bonds have a call provision that allows bond issuers to redeem them at a specific price before maturity date. After the specific date for redemption the issuer will not pay more interests over such bonds forcing the bondholders to resign to them.

Issuers generally exercise the call provision when the markets interest rates fall under the coupon rate of the bonds. This action deprives bondholders of a better performance of their bonds, although it is advantageous for the issuer that carries out this action with high-coupon-rates bonds to after issue new bonds with lower-coupon-rates.

This strategy makes it possible to lower the overall costs of the loan to the issuer. For example, if a corporation issued 10% coupon bonds when the interest rates were high and later fell at 6%, it would be very advantageous for the issuer to reimburse the old bonds with new bonds at a lower coupon rate.

However, if the issued bond contains refunding provision, the issuer is forbidden of using the product of this new lower coupon bond issued specially to reimburse the higher coupon bond previously issued.

Since the refunding provision forbids issuers of bonds to withdraw the bonds of an issue with reimburses purchased through a new issue of bonds.

A bond investor should pay special attention to a bonds issue’s call and refunding provisions

There are three types of call provisions:

  • A non-callable is a bond that the issuer cannot redeem before its maturity. The non-callable bonds offer investors the best protection, but have also many loopholes. The term non-callable implies that bonds cannot be called to retirement before its maturity. However, the non-callable bonds some times have been called, as it occurs in case of fire or in the so called “Acts of God” or when a healthy company stops making its interest payments over its bonds, and the trust make a retirement call of the same and the debt is cancelled quickly. Non-callable-for-life bonds are you in the dealer’s quote as NCL. is
    • A freely callable  bond is a bond that the issuer can call in any time before its maturity. The freely callable bonds do not offer any kind of protection to investors because issuers can make the call in any moment.
    • A deferred callable bond is a bond which the issuer cannot call until after the date previously specified. The deferred callable bonds offer a little more protection due to the bonds that cannot be called until a specific period (5, 10, or 15 years after issue). A bond that is non-callable until 2009 would be you as NC09 on the details quote sheet.

Since call provisions affect investors negatively the issuers compensate bondholders with a call price that is higher than the face value of the bond.

The call price is the price that the issuer pays to retire the bonds called before maturity. The call price is generally the same as the face value plus a call premium.

The call premium specified within the call provision is the same amount that the issuer adds to the face value of the bond. Callable bonds are generally issued with higher coupon rates than those of non-callable bonds because of  the similar risks and maturity as to compensate bondholders for the risks they have to take when its higher performance is confiscated if the bonds are called. You should check the call provision of a bond issue before buying.