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MATURITY

The date at which the face value of the bond is redeemed.

Sometimes, the issue has underlying clauses that allow early redemption. In these cases the debt is said to be terminated (call option or put option).

PERPETUAL

A bond without a maturity date. Interest is paid indefinitely. In general, the issuer reserves the right to redeem the debt by means of call options .

CALL / CALLABLE

When issuing a bond, the issuer can set dates – usually the coupon dates – when it reserves the right to redeem part or all of the bond issue at a price set in the issue prospectus.

A call option represents an advantage for the issuer and a disadvantage for the investor. Additional risks run by the bondholder include :

Uncertainty of future capital flows
Reinvestment

In case of a decline in rates, the investor loses doubly. Firstly, the call option creates an obstacle against issue price appreciation. Indeed, if the bond is being traded at a higher price than the call redemption, then it is in the issuer’s interest to exercise its call option and to float a new issue in keeping with the market conditions in effect, which are more favourable to it. Consequently, investors will not be willing to pay a higher price than the call price .

Moreover, in case of a call, the investor loses its higher coupon and must reinvest its money in a bond that will offer a lower yield than the one that was in place when the terminated bond was bought .

Consequently, a callable bond often offers higher yields than an identical classic bond as a way to offset these risks .

PUT / PUTABLE

A put option is an option that is made available to the creditor or investor. In the bond prospectus, certain dates are identified when the investor will have the chance to require the early redemption of its part of the issue. In the case of a put, the decision is individual.

Puts allow creditors to protect themselves against a decline in the price, which may result from increased rates or a downgrade of the issuer’s credit rating. If the bond is traded at a price higher than the put price, the investor would not be interested in exercising the put option – he or she would prefer to sell the debt on the market. On the other hand, when the market price is lower than the put price, then the investor will gain by exercising the put option .

To the extent that the put option is an advantage for the creditor, a putable bond generally offers a lower yield than an identical classical bond .

CONVERTIBLE

A convertible bond provides a conversion option allowing investors to exchange their bonds for shares under conditions that are laid out in the prospectus. The price of this bond is thus indexed to the underlying share price.

Although less risky than shares, convertible bonds remain exposed to default risk and rate risk. Convertible bonds are senior to common shares. Payment of interest on convertible debt takes priority over dividend payments to shareholders .

These bonds are generally issued at a fixed rate that is lower than those of classic bonds .

REDEMPTION VALUE

The redemption value is the amount the issuer agrees to redeem at maturity. In general, the redemption value is equal to the par value. In such cases, the redemption is said to be made ‘at par’.

If the redemption value is higher (lower) than the par value, the redemption is said to be made above (below) par.

LIFE TO MATURITY

Life to maturity is the time in months and years remaining from the value date to maturity of the bond.

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