Callable and puttable debt gives a view of why and how contracts matter.
Callable, putable, and convertible bonds are three examples that demonstrate the importance of contracts and how they can be worded in a way to reduce conflicts among various stakeholders.
"A bond is callable when the issuer has the right to return the investor's principal and cease all interest payments before the bond matures."Edit Remove Move
This video explains the meaning of callable bonds and why these types of bonds are issued. It also shows why they may have a higher coupon rate and who benefits most from the call feature of a bond. Questions or Comments? Have a question or topic you'd like to learn more about?Edit Remove Move
Puttable bond is a bond with an embedded put option. The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal. The put option is exercisable on one or more specified dates. This video is targeted to blind users.Edit Remove Move
Convertible bonds are corporate bonds that investors are able to 'convert' to a set number of shares of the issuer's common stock. So why not just buy the company's stock in the first place? Watch to learn more. Questions or Comments? Have a question or topic you'd like to learn more about?Edit Remove Move
Different answers to this exist, but mainly they center around interest rate and a reduction of conflicts between bondholders and shareholders. From a market efficiency perspective, the conflict reduction hypothesis seems to make more sense.
The authors find that firms with poor future investments are more likely to issue callable debt on the premise that if they do not need the money, the firm will call the debt back. "We argue that callable bonds can be used to hedge investment risk, since they can resolve risk shifting problem when firms' investment opportunities are poor. Our empirical findings strongly support this argument. We find that firms facing poorer future investment opportunities are more likely to issue callable bonds. In addition, firms with higher leverage ratio and higher investment risk are more likely to issue callable bonds"Edit Remove Move
"Convertible bonds are hybrid securities that have both debt and equity features. Like a normal straight bond, the buyer receives coupon payments at the interest rate specified on the bond until maturity, when the company redeems the bond at par. However, the bond holders also have the option to convert the bond's value into the issuing company's shares at an agreed-upon pre-specified ratio."Edit Remove Move
New players to the investing game often ask what convertible bonds are, and whether they are bonds or stocks. Essentially, they are corporate bonds that can be converted by the holder into the common stock of the issuing company. In this article, we'll cover the basics of these chameleon-like securities as well as their upsides and downsides.Edit Remove Move
When you buy a bond with an attached warrant, the warrant gives you the right to buy a certain number of fixed-price shares of the stock of the company that issues the bond. You are not obligated to ...Edit Remove Move
Journal of Fmanctal Economtcs 7 (1979) I17- 161 0 North-Holland Pubhshing CompanyON FINANCIAL CONTRACTINGAn Analysis of Bond Covenants*Clifford W. SMITH, Jr. a...Edit Remove Move