Definition
Noncallable is a term used to describe preferred stocks or bonds that cannot be redeemed or called back by the issuer before a specified date or at all. This feature provides investors with a greater degree of security and predictability regarding the return on their investment because the issuer is not allowed to force redemption before maturity.
For example, a bond with a noncallable feature may provide call protection for a fixed period, such as ten years. During this period, the issuer cannot call, or redeem, the bond before it matures. After this period expires, the bond may become callable, allowing the issuer to redeem it if certain conditions justify doing so.
Examples
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Corporate Noncallable Bonds: A corporation issues a 20-year bond that is noncallable for the first ten years. During these ten years, the investor knows that their bonds will not be redeemed early, providing stability in terms of expected interest payments.
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Noncallable Preferred Shares: A company issues preferred shares with a noncallable feature, meaning the issuer cannot redeem the shares at its discretion before a specified period, or sometimes, ever. This gives the shareholders confidence in the longevity of their investment.
Frequently Asked Questions (FAQs)
What is the main benefit of noncallable bonds?
The main benefit of noncallable bonds is the stability and predictability they provide to investors. Investors are assured that their bonds cannot be called back by the issuer, leading to a steady stream of interest payments and eliminating reinvestment risk.
How does call protection affect investors?
Call protection ensures that the bond or preferred stock cannot be redeemed early by the issuer, which protects investors from reinvestment risk and potential loss of higher interest earnings.
Are noncallable bonds risk-free?
No investment is completely risk-free. While noncallable bonds provide some protection against interest rate volatility and reinvestment risk, they are still subject to credit risk, market risk, and inflation risk.
Do noncallable bonds typically offer lower or higher interest rates compared to callable bonds?
Noncallable bonds often offer slightly lower interest rates compared to callable bonds because they provide greater security and predictability to the investor. Issuers compensate callable bonds with higher interest rates to make them attractive despite the call risk.
What happens to a noncallable bond after the call protection period ends?
Depending on its terms, a noncallable bond may become callable after the call protection period ends. At this point, the issuer has the option to redeem the bond if it is advantageous to do so.
Related Terms
- Callable Bond: A bond that can be redeemed by the issuer before its maturity date, often at a premium above the face value.
- Credit Risk: The risk that the issuer of a bond may default on its obligations, leading to a loss of investment for bondholders.
- Reinvestment Risk: The risk that the proceeds from a callable bond will be reinvested at a lower interest rate than the original investment.
- Maturity Date: The date on which the principal amount of a bond is to be paid in full to the bondholder.
- Yield: The income return on an investment, usually expressed as an annual percentage rate based on the investment’s cost or market value.
Online References
- Investopedia: Noncallable Bond Definition
- Wikipedia: Non-Callable Bond
- SEC - U.S. Securities and Exchange Commission: Bonds
Suggested Books for Further Studies
- The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More by Annette Thau
- Introduction to Fixed Income Analytics: Relative Value Analysis, Risk Measures and Valuation by Frank J. Fabozzi
- The Handbook of Fixed Income Securities by Frank J. Fabozzi
Fundamentals of Noncallable Financial Instruments: Finance Basics Quiz
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