CFA Level 1 - Fixed Income Investments
Regular or General Redemption Prices - These price tend to be above par until the first par call date. The price is typically known before the redemption occurs.
Special Prices - These occur because of certain events such as sinking funds, repossessions, forced sales, and eminent domain. These usually occur at par value but could be less, depending on the collateral backing the bonds.
When callable bonds are called, it can be for the entire issue or for just a part of it. A partial call can be done on a random basis, like picking numbers out of a hat, or on a pro rata basis. A pro rata call allows all holders to redeem a certain percentage of their holdings while with a random, partial call it could be anyone's guess as to which bonds will be called by the issuer.
Price can be determined as a fixed price, regardless of dates, based on a predetermined schedule of dates in which price decreases as it nears the bond's maturity date, as well as through a make whole call.
Example: Call Redemption
Let's use the Stone and Co 12's of 20, or Stone and Co 12% bonds of 2020 to illustrate a scheduled call.
Fixed price regardless of date:
- This call provision allows the bond to be called at par plus interest at any date past Jan.1, 2010.
Price based on Schedule.
This call provision bases its price on stated dates with the price decreasing as the bond nears maturity.
Jan 1. 2010 Price = 103 or $1,030 based on a par value of 100
Jan 1. 2012 Price = 102 or $1,020 based on a par value of 100
Jan 1. 2015 Price = 101.5 or $1,015 based on a par value of 100
- Price based on a Make-Whole Premium