The common saying is that it is a woman’s prerogative to change her mind. Changing your mind does not show that you are ditzy, it shows that you can respond successfully to a changing environment. If you are a small but rapidly growing company you may not have a very high credit rating, but you certainly need capital to grow. You can get this capital by issuing bonds, but you may have to pay a large coupon for investors to take your credit risk. If your cash flows prove to be steady and growing and you have your debt payments well covered then your credit rating will improve. But you will still be lumped with a coupon that was set when you were paying a large credit spread. In such a case issuers of bonds may also choose to change their mind and re-finance their debt at the lower rate.

The debt capital markets team can build a clause into the bond prospectus to allow issuers to change their mind, but this turnaround is not willy-nilly. A bond can have a call schedule. This is a set of dates on which the bond principal can be repaid to bond holders. If a bond was issued with a coupon of 10% and the company can now fund itself more cheaply at, say 8%, then on the next call date the issuer will call the debt. Investors are aware of the call dates and often work out a yield based on the next call date, the “yield to call” rather than “yield to maturity”. Alternatively they will work out “yield to worst” which means they work out the bond yield to each call date and quote the lowest of those yields.

A call option is worth money to the person that has the choice to exercise. Call features are beneficial to the bond issuer because the bond will be called precisely when the bond price is high. Effectively the bond investor has sold a call option to the bond issuer. Bonds with a call feature usually carry a slightly higher coupon to pay for the issuer’s option. Bonds are sometimes labelled 5NC3 which means the bond has a maturity of 5 years but is non-callable for 3 years, and this gives a grace period during which bond investors know they will receive their coupon and the bond will not be called.

It is not just bond issuers that can change their mind, it can also be bond investors. If the bond issuer wants to make a bond more investor-friendly they can make it puttable. A put feature gives the power of choice to the investor such that they can force the issuer to pay them back the face value of the debt, usually at par, on a set schedule of dates. Investors will usually put a bond when it is trading well below par which can occur if the issuer becomes distressed or if the general level of interest rates rises. Puttable bonds give investors peace of mind. Our debt capital market team are capable of pleasing everyone: some bonds that they issue are both callable and puttable.

You can find out more about callable and puttable bonds in Chapter 5 of the Financial Bestiary which is all about bonds.