CandleFocus

Hard Call Protection

Candlefocus Editor
Investors gravitate towards callable bonds due to the high yields they provide. A bond's yield is calculated by subtracting the face value of the bond from its current market price. A callable bond's specified call date is reflected in the bond's yield by providing investors with an additional return over and above a non-callable bond. For the callable bond, that return is known as the yield-to-call and factors in the possibility of the bond being called.

The inclusion of hard call protection in a callable bond means the issuer will not be able to call it prior to the secure date. This feature is often referred to as ‘yield-to-hard call protection’ and provides the investors with a guaranteed minimum yield over the protected period.

Hard call protection is attractive for investors looking for a safer stream of income. The maximum yield the issuer can call their debt to get investors to invest in the bond is fixed at an amount lower than prior to the occurrence of hard call protection. This feature prevents the issuer from re-pricing their debt before the expiration of the stated period. Furthermore, investors are provided with the option to continue holding the bond if the issuer misses the call date and provides a better yield than any other investments.

The hard call protection feature is beneficial to both investors and issuers. From the investor’s point of view, they are assured of a safe stream of income and have a chance to peacefully wait until the call date if the return on other investments is low. From the issuer’s view, it reduces the risk of a sudden call of the bond, which would then reduce the liquidity in the market and have an effect on the issuer’s credit rating.

Callable bond issuers that insert hard call protection into their bonds do so to attract investors, as this provision provides a sense of security for the investor. By being protected for a certain number of years, the investor is able to forego other investments in this time period, strengthening the bond in the process.

Overall, hard call protection makes callable bonds more attractive and provides investors with added security. The issuer gets to attract more investors due to the added assurance that the bonds will not be called in that protected period. In the end, hard call protection is beneficial to investors, issuers and the bond market as a whole.

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