What is the Difference Between Callable and Convertible Bonds?
🆚 Go to Comparative Table 🆚The main difference between callable and convertible bonds lies in their features and the options they offer to the issuer and the bondholder. Here are the key differences:
Callable Bonds:
- Callable bonds, also known as redeemable bonds, can be redeemed by the issuer prior to their maturity date.
- Issuers may choose to issue callable bonds to gain the flexibility to respond to interest rate fluctuations.
- Callable bonds generally offer a higher coupon in exchange for the repurchase option.
Convertible Bonds:
- Convertible bonds are debt instruments that can be converted into a predetermined number of equity shares by the bondholder.
- Convertible bonds offer bondholders the option to exchange their debt to equity, going from being a lender to a part-owner of the company.
- Convertible bonds generally offer lower yields because they come with the potential upside of conversion.
In summary, callable bonds provide the issuer with the option to redeem the bond before its maturity date, while convertible bonds allow the bondholder to convert the bond into shares of the company.
Comparative Table: Callable vs Convertible Bonds
Callable and convertible bonds are two popular types of bonds among many. The key difference between them lies in their redemption and conversion options. Here is a table comparing the differences between callable and convertible bonds:
| Feature | Callable Bonds | Convertible Bonds |
|---|---|---|
| Definition | Callable bonds, also known as redeemable bonds, are bonds that can be redeemed by the issuer prior to maturity. | Convertible bonds are debt instruments that can be converted into a predetermined number of equity shares during the life of the bond. |
| Redemption | Callable bonds allow the issuer to redeem their bonds before the maturity date. | Convertible bonds offer bondholders the option to exchange debt for equity. |
| Conversion Option | Callable bonds do not have a conversion option. | Convertible bonds come with a conversion option, allowing bondholders to convert their bond into a predetermined number of equity shares. |
| Interest Rates | Callable bonds typically offer a higher yield than non-callable bonds, as they carry the risk of being called before maturity. | Convertible bonds often provide a steady income stream and greater stability, but they may have a lower yield. |
| Call Provisions | Call provisions allow the issuer to redeem the bonds before their maturity date, typically at a premium to the bond's face value. Some convertible bonds also come with call provisions. | Convertible bonds do not have call provisions unless they are convertible with call provisions. |
In summary, callable bonds offer a higher yield but carry the risk of being called before maturity, while convertible bonds provide a steady income stream and the option to convert the bond into equity shares.
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