What is the purpose of a graduated scale for callable bonds? Why pay - ProProfs Discuss
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What is the purpose of a graduated scale for callable bonds? Why pay more to the investor if the bonds get called early versus paying less when the bonds are called late?

Asked by Freya, Last updated: Nov 29, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

If an investors bond gets called a year after investment when he or she was expecting to hold the investment for 10 years, the circumstance can be aggravating. Not only is it a hassle to have to go out and replace that investment, yields may also have changed and the investor will also have to pay a commission to replace the investment. This is seen as a lot more trouble one year into the life of a 10-year investment rather than 9 years into the life of a 10-year investment. As such, the issuer may have a graduated scale that compensates investors when the issuer calls back the bonds. The closer to the maturity date, the lower the compensation the investor will receive if the bond is called because the investor is closer to the investment objective of holding the bond to maturity. Consider that a person who holds the bond for 9 years received 9 years worth of interest payments while a person who only had the bond for one year received a lot less from their investment.

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