# Misleading Yield (Callable Bonds with call price 100)

When looking at Callable Bonds, I've noticed that we often have a call price of 100 with a call date a few month before expiry. For example:

• US09681MAS70: coupon 2.625%, expiry 2030-09-17, callable from 2030-06-17 for \$100.0
• FR0013509627: coupon 2.000%, expiry 2024-10-24, callable from 2024-07-24 for €100.0

It seems one implication of this is that the bond holder will never actually receive 100 + coupon on expiry, as the issuer will always call the bond for 100 before that. Or in other words, the final coupon is effectively 0?

Questions:

1. Why are callable bonds (often) structured like this? Why not set the final call price to 100 + coupon? Or simply shorten the bond by one payment period (as we are skipping the final coupon anyway)?
2. If the (dirty) price of FR0013509627 is 106.30 with quoted yield 0.65%, then this yield calculation (via Street Convention) assumes no callable features (i.e. the yield calculation assumes the final coupon gets paid). Doesn't this mean the quoted yield is misleading? Since the bond will never actually pay the final coupon, shouldn't the effective yield be lower? E.g. somewhere around 0.15%?

The strike in these examples is the clean price. If a bond is called, then the bond holder receives the strike plus the accrued interest. It's exactly as if the bond hold sold the bond in the secondary market for clean price = strike.

Bonds are frequently issued to be callable at par in the last few months of their lives for convenience: the issuer expects to raise the money needed to repay the bonds a little before maturity, and don't want to hold on to this money and pay interest until the last day. (Also sometimes shortly before the maturity some issuers has some regulatory / accounting requirements to jump through certain liquidity hoops, and it may be more convenient to exercise the call even if it looks a little out of the money.)

Generally, a yield quoted for a callable bond is tagged "yield to maturity" (which ignores the call), "yield to call" (which assumes that the call will be exercised), "yield to worst", etc. It is not safe to look at YTM and to assume that the call won't be exercised.

• Just to double check. When the bond issuer calls the bond at its clean price 100, then the issuer actually has to pay the dirty price (= clean price + accrued). So if the bond was called e.g. 1 day prior to its expiry, the bond issuer would effectively pay 100 + coupon to the bond holder (ignoring the 1 day of accrued)? And not 100? Oct 14, 2020 at 22:46
• That's exactly right. Oct 14, 2020 at 23:05
• Perfect, thank you. Are these strikes (or "call prices") always quoted as "clean prices"? Oct 14, 2020 at 23:22
• Yes. (Further, if make-whole calls are exercised, the bond holder effectively gets a dirty price too.) Oct 14, 2020 at 23:30
• Sure, for example US458140BP43 callable at T+45 (i.e. US treasury + 45 bps) or US458140BQ26 and US458140BR09 callable at T+50 Oct 15, 2020 at 0:21