WHY WOULD CALLABLE BONDS TRADING AT A PREMIUM BE TREATED AS A SHORT - ProProfs Discuss
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Why would callable bonds trading at a premium be treated as a short-term bond while a callable bond trading at a discount would be treated as a long-term bond?



Asked by Jayden, Last updated: Sep 17, 2022

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

If a callable bond was trading at a premium, that must mean that interest rates have dropped (remember that as interest rates fall, bond prices rise). as such, the issuer may be interested in calling back the bonds and reissuing at a lower coupon rate to save money. if thats the case, its not likely the bonds will reach their original maturity date. instead, the bonds would be treated more as a short-term issue with the first call date acting as the maturity date.on the flip side, if interest rates increased and bond prices dropped to a discount, its unlikely that the issuer would be calling back the bonds. to do so would then require that the issuer borrow more funds but at a higher cost in order to replace the funds they paid back when calling the bonds. if this is the case, callable bonds trading at adiscount will likely be treated as a bond that matures on its originally intended maturity date.
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