Callable & Convertible Bonds
Callable bonds let the ISSUER redeem early — typically when rates fall — so they pay more yield and often include call protection; convertible bonds let the HOLDER exchange the bond for a set number of common shares.
The exam loves a two-step conversion calculation: take the conversion ratio, then find parity — the point where the bond and its underlying shares are worth the same. Using 25 shares, the bond is at parity when the stock reaches $40 (25 × $40 = $1,000 par); converted value at any moment is simply shares × current stock price. The other staple is yield ordering: on a callable trading at a premium, yield to call is the lowest yield, so it is the yield to worst a broker must quote (tie this to yield-measures).
Don’t read a callable’s higher coupon as strength — that extra yield is compensation for call risk and reinvestment risk (per bond-price-and-yield, falling rates lift prices but make a call more likely, forcing reinvestment at lower rates). Conversion, by contrast, is the holder’s option, exercised for equity upside. Even so, convertibles are usually unsecured debentures, and that equity feature doesn’t lift their creditor rank in the corporate-bonds liquidation order.
PlayPrepHQ study notes are written and reviewed against primary exam sources. How we create & review content →