Who issues the issuer s options
Bank Guarantee or Letter of Credit Keepwell agreements or a letter of support can be enhanced by the inclusion of a bank guarantee or letter of credit. This additional support by the bank comes at an additional cost to the issuer, but significantly enhances the credit quality of the bond, since bondholders can now look towards the bank for legal recourse in the event that the issuer defaults.
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This usually serves the purpose of allowing bondholders the right to repayment prior to the maturity date, in the event of a takeover of the company. Coupon Reset A common feature in perpetual bonds, a coupon reset results in the coupon rate being changed according to a specified formula, on specified date s.
For investors, this mitigates the interest rate risk and serves as a possible disincentive for the issuer to keep the bonds outstanding.
The absence of a coupon reset encourages the issuer to keep the bonds outstanding if interest rates rise, while a decline in rates would see the issuer call the bonds early, leaving no duration benefit for the bondholder.
The reset rate is typically tied to a reference rate plus a slated margin, e.
Coupon Step-up Referring to a step-up and thus increase in bond coupon rate, this feature also provides investors with the benefit of keeping up with potentially rising interest rates. While some bonds may only have a single step-up feature, others may offer multiple step-ups throughout their lifetime. These step-ups may also be offered based on certain conditions being met, such as the bond not being called, change-of-control events, covenant breaches and so on.
Deferred Interest Payment Bonds with such a feature allow issuers to cancel interest payments and defer them indefinitely, or for a specified period, without triggering a default.
In some scenarios, the issuer may not be limited in terms of the maximum number of times interest can be cancelled or deferred.
Structure and features[ edit ] Warrants have similar characteristics to that of other equity derivatives, such as options, for instance: Exercising: A warrant is exercised when the holder informs the issuer their intention to purchase the shares underlying the warrant. The warrant parameters, such as exercise price, are fixed shortly after the issue of the bond. With warrants, it is important to consider the following main characteristics: Premium: A warrant's "premium" represents how much extra you have to pay for your shares when buying them through the warrant as compared to buying them in the regular way. Gearing leverage : A warrant's "gearing" is the way to ascertain how much more exposure you have to the underlying shares using the warrant as compared to the exposure you would have if you buy shares through the market.
In the event of a who issues the issuer s options deferral, any missed interest payments are still legally owed to the investor. As for a non-cumulative deferral, these are permanently forgone. Extendable Tenor With this, bond holders or issuers are given the right to extend the maturity of the bond.
Investors may be interested in such bonds as it allows them to take advantage of the changing interest rates without immediately taking on the risk of holding a long-dated bond.
If the bond provides the holders with the option to extend the maturity, it is priced as a puttable bond. Should the right lie with the issuers, it is likely to be priced as a callable bond.
Keepwell Agreements Keepwell agreements can sometimes be drafted as a form of credit enhancement for a bond — this is usually an agreement between the parent company and the subsidiary which is the issuerwhere the parent agrees to keep the issuing subsidiary in good financial healthy, by maintaining certain financial ratios or levels of equity. Unlike a guarantee, keepwell agreements are not legally binding, and depending on the way such agreements are drafted, they can be similar to a parent guarantee or simply having perfunctory or superficial enhancement qualities for the particular bond.
In the event of a make-whole-call, the issuer has to make a one-off payment that is equivalent to the net present value of all future coupon payments not paid because of the call from the bond — these are usually discounted at a predetermined rate e.
Treasury rate plus a spread. This is usually a superior outcome compared to a traditional issuer call, in which case all future coupon payments are discontinued given the early termination of the bond.
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Credit enhancement features can be viewed favourably by investors, giving them more confidence in bonds that carry these features. However, as it may result in the bond receiving a higher credit rating, this may also result in lower coupon rates. Effect on bond price In general, bond features can either add to or subtract from the value of a bond, depending on whether the option is a benefit to the bondholder or the issuer.
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For example, the presence of an embedded issuer call option is a benefit to the bond issuer, and detracts from the certainty of returns for the bondholder. As a result, a bond with an issuer call feature should, in theory, trade at a discount or provide a higher yield compared to a bond without such a feature, assuming all other things are constant.
In contrast, a bondholder put option which allows the bondholder to require the issuer to redeem the bond at a predetermined date benefits the bondholders. As such, a bond with such a feature would likely trade at a premium or have a lower yield compared to one without such a feature, again assuming all other things demo account on the exchange held constant.
All Contents here in do not constitute financial advice or formal recommendation and must not be relied upon as such.
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