The AI (ChatGPT) Bond Investing Handbook: Bond Call Risk
Here is the response from ChatGPT for the prompt bond call risk 200 words entered on February 20, 2023.
Bond call risk refers to the risk that a bond may be redeemed or "called" by the issuer prior to its maturity date, resulting in the investor receiving their principal back earlier than expected. This can lead to a loss of potential future income if the investor intended to hold the bond until maturity, as well as a potential loss in principal if the bond is called at a price lower than the investor's purchase price.
Bond issuers typically have the option to call bonds when interest rates have fallen, allowing them to issue new bonds at a lower interest rate and save on interest payments. This can be beneficial for the issuer, but it can be detrimental for the investor who may have to reinvest their principal at a lower rate of return. In addition, a bond call may occur when the issuer has access to other sources of financing at a more favorable rate, or when there is a change in the creditworthiness of the issuer.
To manage bond call risk, investors may consider purchasing bonds with longer maturities, as these bonds are less likely to be called. Investors may also consider purchasing callable bonds with a higher yield, which compensates for the added risk of a potential bond call. Additionally, investors may consider using bond laddering, a strategy that involves purchasing bonds with varying maturities to balance the potential benefits and risks of bond calls over time.
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