标题: Fixed income Reinvestment risks [打印本页] 作者: Jupiter 时间: 2011-7-11 18:43 标题: Fixed income Reinvestment risks
When the book talks about the "interest rate" in the book under reinvestment risk are they referring to coupon rate as the interest rate ?
Companies call their bond when interest rate falls. They are referring to coupon rate here right? because they would be able to reissue bond at a lower coupon, therefore less coupon/interest payment for the company.
Please clarify this for me thank you.作者: Micholien 时间: 2011-7-11 18:43
"Companies call their bond when interest rate falls. They are referring to coupon rate here right? because they would be able to reissue bond at a lower coupon, therefore less coupon/interest payment for the company."
No, this is just the interest rate/discount rate for that bond. Coupon rates are generally correlated with these interest rates, but they don't drive the call behavior.
Basically, when rates fall, the value of bonds go up. So, issuers of bonds will have a greater liability to the bond holders. If there is a call provision, the issuers can buy back the bonds at at the strike price. So, when will they decide to exercise this call right? Obviously, when rates are low and bonds are expensive.
