Question

10. What is call risk? When are bonds likely to be called and why? 11. What is the difference between premium bonds and discount bonds? Include something about their coupons. 12. What is the difference between senior bonds and subordinate debentures? 13. What do bond rating measure?

Answer 1

call risk of bond relates to the risk of being called by the issuer for payment. This risk arises due to decrease in market interest rates. As the market rate of interest declines, issuer will call the bond before the maturity and issue new bonds at lower rate of coupon rate. This will helps in saving the payment of coupon on bonds.

2- Premium bond is debt instrument which is issued more than the par value for example a bond of par value of 1000 issued for 1200 so 200 would be premium on bond. While discount bond is a debt instrument which is issued at a price less than the par value. for example bonds of 1000 par value issued for 800.

Another way to define the premium bond is that when coupon rate on bonds is more than the market interest rates bonds are called premium bonds and when coupon rate is lower than the market interest rate such kind of bonds are called discount bonds

3- Senior bonds are those types of bonds which are having high priority in the payment of principal by the issuer like fully secured bonds, senior secured bond, senior unsecured bonds etc. while subordinated bonds are those bonds which get their principal payment once senior bonds are paid.

4- credit rating is used to measure the creditworthiness of the issuer and issue of debt. it provides a rating on the basis of financial information of the company. credit rating is used for investment decisions.