Rate Trigger

And finance Allah shmoop what is called protection and how

does it work So you wish this term was about

preventing those annoying telemarketers who call you right in the

middle of dinner hoping to sell you X and satellite

subscriptions But it's not Call protection has to do with

a bond being called early meaning that the company that

issued the bond I either company that borrowed the money

is paying at least full par value principle if not

a percent or two premium above that figure when they

call the bond So why would you want protection against

this happening Like isn't it a good thing that bonds

get called back by the people who borrow the money

and then get fully paid off Well the answer No

not always Let's say a bond is issued in a

high interest rate environment like the Fed is trying to

cool inflation so they have short term high interest rates

or high short term borrowing costs That calm six percent

for one year paper eight percent for five year paper

for the best borrowers and a bond you invested in

was yielding two hundred basis points above those U S

government bonds or in this case and say it's five

year paper That's a yielding ten percent But then inflation

cooled and the Fed suddenly lowered rates a lot and

that six percent paper a few years later pays only

four percent and that five year eight percent paper is

now down Teo five percent Well the company that issued

its bond paying ten percent interest could refinance that bond

today at only seven percent interest And they do Right

so they're saving three points of interest Unusually you know

like a billion dollars of Borrow They call the bonds

back home to the mother ship Yep they paid them

all off Maybe with say a two percent premium Big

Woop so that a thousand dollars par unit of the

bond gets one o two or a thousand twenty to

pay it off and retire it well thank you The

investor in that bond who thought you were getting ten

percent a year in interest for a while You can't

even find paper like that in the market The best

you can do of similar risk in duration is only

seven percent so you've lost three percent per year compounded

interest by having those lovely ten percent yielding Bonds called

its protection against this lost yield that bond holders want

and well that's how it works If you'd had bonds

that were uncool a ble or call pretty detected the

company couldn't just buy them back and refinance with cheaper

paper So yeah that's why it's always nice to have

your bonds protected and for even greater security we recommend 00:02:25.28 --> [endTime] investing in a Rottweiler