Question

What is the effect coupon rate for Callable bond, Non-callable bond, and Puttable bond?

Answer 1

Everything remains constant, what is the effect of coupon rate on

1. Callable bonds:
It is long term fixed rate Bond where the issuer enjoys a call option that is right to buy back the bonds from the investors prior to maturity at a predetermined price known as call price. the call price is usually at a premium to face value.

The issuer will obviously call the bonds (that is refund prior to maturity) if the interest rate falls, such that issuer can refund the old bonds and issue new bonds at a lower interest rate.

When interest rate falls, the bond are price at their highest price.

Here the advantage is for the issuer: to compensate for the Advantage by issuer- the coupon rate is set higher than non-callable bonds.

2. Non- callable bonds.

Here the coupon rate is normal. That is on par with the industry standards.

3. Putable bonds.
Contrary to callable bonds where the issuer has the advantage. Here the Bondholders have an advantage.

So to maintain a balance: the coupon rate is set lower than non-callable bonds.