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Perpetual bonds with a call date
23 Nov 2021 (220 views)  

My stockbroker sent me a chart showing the corporate bonds that are available. 

I saw that two bonds from Ascott Residential Trust showed vastly different yields to maturity. 

I spoke to the bond desk for clarification. 

The second bond (with 3.08% coupon) showed an exceptionally high yield of 22.25%. This was calculated on the assumption that the bond would be called on 30 Dec 2021. The yield was magnified because the premium of 1.75% (difference between the purchase and redemption price) was magnified by the short period to the call date.

The issuer does not have the obligation to call the bond. They may allow it to roll over for another 6 months. If the bond is called 6 months later, the difference of 1.75% will reflect an increased yield of 3.5%. 

The running yield is 3.07/.9825 = 3.12%. 

If the bond is called in 6 or 12 months time, the return would be quite attractive:

Bond called in 6 months time:  yield 3.12%+3.5%=6.62%. 
Bond called in 12 months time: yield 3.12% + 1.75% = 4.87%

If it is called, the yield is quite attractive.

Risk.
If the interest rate goes up, the issuer will not call the bond. The investor would be stuck with a low coupon rate and low yield. Maybe, it is not so attractive after all.

Note - I am not familiar with corporate bonds. So, my observation may be wrong. Please check with your broker before you decide to buy this bond.

Tan Kin Lian

 


Perpetual bonds with a call date
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My stockbroker sent me a chart showing the corporate bonds that are available. 

I saw that two bonds from Ascott Residential Trust showed vastly different yields to maturity. 

I spoke to the bond desk for clarification. 

The second bond (with 3.08% coupon) showed an exceptionally high yield of 22.25%. This was calculated on the assumption that the bond would be called on 30 Dec 2021. The yield was magnified because the premium of 1.75% (difference between the purchase and redemption price) was magnified by the short period to the call date.

The issuer does not have the obligation to call the bond. They may allow it to roll over for another 6 months. If the bond is called 6 months later, the difference of 1.75% will reflect an increased yield of 3.5%. 

The running yield is 3.07/.9825 = 3.12%. 

If the bond is called in 6 or 12 months time, the return would be quite attractive:

Bond called in 6 months time:  yield 3.12%+3.5%=6.62%. 
Bond called in 12 months time: yield 3.12% + 1.75% = 4.87%

If it is called, the yield is quite attractive.

Risk.
If the interest rate goes up, the issuer will not call the bond. The investor would be stuck with a low coupon rate and low yield. Maybe, it is not so attractive after all.

Note - I am not familiar with corporate bonds. So, my observation may be wrong. Please check with your broker before you decide to buy this bond.

Tan Kin Lian