Called Bonds: Call Dates, Clean Prices, and Accrued Interest
Summary
The document examines why a called corporate bond may still show market prices after its effective call date and asks how to treat accrued interest during the gap before settlement. It explains that call notice periods and call schedules vary, and distinguishes European, Bermudan, and American call provisions. For yield-to-worst analysis, the answer advises accounting for the earliest permitted call date, using the prospectus to check notice terms; it also notes that a missing data field may represent a standard notice period.
The accepted answer says coupon accrual stops on the call date, and describes a typical call payment as a clean call price plus accrued coupon. It distinguishes fixed-price calls from make-whole calls, whose price depends on a discounted value of remaining cash flows. A second answer instead says interest accrues through the day before settlement, citing a typical settlement lag. These explanations conflict on the accrual end date, so the document does not settle the specific case; the governing bond terms and applicable market convention need to be checked.
Key ideas
- Call provisions can be European, Bermudan, or American, and notice periods should be checked in the prospectus.
- A call price is commonly a clean amount, with accrued coupon handled separately.
- Make-whole call values depend on discounted remaining cash flows and market rates.
- The answers disagree on whether accrual ends at the call date or continues until just before settlement.
- The document does not resolve the specific bond's accrual treatment.
Tags
Full text
# What are clean price and accrual of a called bond # What are clean price and accrual of a called bond I found that after a bond is called (after the call effective date), BBG still shows bond prices for a few more days. Take XS1648303813 for example, it is called on 24th Sep 2020, but it has prices on 25th and 28th. How about the accrual ? what should be its accrual in this case for dates between 25th and 28th? ## Answer by Dimitri Vulis (score 3, accepted) https://quant.stackexchange.com/a/60036 When a bond issuer calls a bond, they give a notice, typically 30 calendar days, but sometimes 45 or 60 etc. The number of notice days can usually be found in the bond's prospectus. The calls can be European (callable on one date), Bermudan (callable on a list of dates, which usually coincide with coupon dates), or American (callable on or anytime after some date). Bloomberg has a "call days" field, but inconveniently leaves it blank if it is 30. When you copy data from Bloomberg to your local database or spreadsheet, you should replace blank call days by 30 for callable bonds. So, for example, if you're trying to find the yield to worst for a bond that has an American call, you should assume that the bond can first be called after "call days" days. The coupon accrual stops on the call date, not when the call is announced, not plus-minus any days to settle. There is usually less liquidity after call announcement, but the bond still trades, at price close to call price. There usually isn't quite any bond left to trade after the call date. The call date works very much like maturity date. A bond call price is usually the fixed clean price (usually just par, sometimes par plus the remaining coupons) so the bond holder receives the clean call price plus the coupon accrued until the call date. But sometimes make-whole calls get exercised too. For a make-whole call, the dirty price is going to be calculated on the call date by observing some treasury (usually on the run 10 year), adding some spread specified in the prospectus, and using this to discount the remaining cash flows of the bond. Their present value will be the call price. Inconveniently, Bloomberg just leaves the call price field blank for make-whole bonds, so you should calculate it yourself (keeping in mind that it is an estimate that will change every time treasuries move). ## Answer by AlRacoon (score 1) https://quant.stackexchange.com/a/60037 When a corporate bond is called, the corporation is purchasing it's own bonds from existing bond holders. Corporate bonds are typically t+2 settlement. The bonds were called on t (trade date) and no longer trading after this date, the issue is still outstanding until they are settled on t+2 (Sept 28). The corporation owns the bonds as of the call effective date. However, the owner that tenders the bond to caller is due the accrued interest. Interest continues to accrue to, but not including the settlement date (so in this case it would include interest up to the 27th, according to the day count convention of the bond.) Even though the effective date is when the corporation owns they bond, they will not be delivered and take custody of the bond until 2 days later on settlement date. Does this answer your question?
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