May 2000 C6 #6

[Anonymous]

What's the difference between choices:
III. Non-refundable for 5 years, refundable thereafter
IV. Callable immediately, non-refundable for 5 years

Non-refundable means they can't issue new debt to call in the old debt for 5 years. This seems to be the only restriction on both of these, so which has more protection? The answer implies that III has more protection than IV.

Doesn't non-refundable imply that it is callable, and non-refundable for 5 years implies that it is refundable thereafter, so I'm not seeing the difference.[/quote]

[Exam Slave]

I don't see a difference, even after reading the HOFIS on it.
"III. Non-refundable..." implies callable for other reasons, same as IV.
See page 11.

[In England]

III. Can't call for 5 years, can call with internally generated funds thereafter
IV. Can't call for 5 years, can call for any reason thereafter

Therefore, III has more call protection than IV.

[Exam Slave]

IE, that would make III "noncallable", not nonrefundable.
Page 11: "The distinction lies in the fact (FACT!) that nonrefundable debt can be called if the funds used to retire the bond issue are obtained from internally generated funds."

Non-callable encompasses non-refundable, but not the other way around, else they'd be equivalent terms.

[In England]

OK, after staring at this question and The Handbook (old edition page 219), I still don't understand how to solve this problem! Does anyone else have an idea?

[New at pd]

Here is a question for everyone:

We all (I hope by now) know that non-callable bonds can't be called for any reason, while non-refundable bonds can only be called using internally generated funds.

Is there then a difference between callable bonds and refundable bonds?
It seems like there isn't. It seems to me as if either can be called for any reason.

Any thoughts are greatly appreciated.

[In England]

I see your point, but then what is the difference between I and IV?

The entire question is:
I Noncallable for 5 years, callable thereafter
II Callable immediately
III Non-refundable for 5 years, refundable thereafter
IV Callable immediately, non-refundable for 5 years
Answer: I > III > IV > II

[New at pd]

I see your point, but then what is the difference between I and IV?

The entire question is:
I Noncallable for 5 years, callable thereafter
II Callable immediately
III Non-refundable for 5 years, refundable thereafter
IV Callable immediately, non-refundable for 5 years
Answer: I > III > IV > II

The difference between I and IV is that in the first five years, bond I has added protection due to the fact that it can't be called for any reason, while bond IV can still be called using internally generated funds. After five years, they are both callable.

I don't like the way that IV was worded -- it seems as if they've overlapped time frames. A bond can't be non-refundable and callable at the same time.

[In England]

Then, New at c6, are you saying there is no difference between III and IV?

[New at pd]

Then, New at c6, are you saying there is no difference between III and IV?

If we agree that callable = refundable, then yes. Whether or not that's true, I don't know.

[Indep]

It may be best to think of refunding as a subset of calling. It is essentially calling through refinancing, when rates are low.

So if it's not callable, it's not refundable.

If it's not refundable, it's still callable by means of generating cash through business means (just not through refinancing).

Therefore, non-callable provides more protection.

Anyone with me on this?

[New at pd]

That's just stating that which we already know, that non-callable bonds offer more protection than non-refundable bonds.

Is there a relation between callable and refundable bonds?

[FIOB]

My guess is that if they say it's refundable, then it can only be called using internally generated funds. So, refundable does not mean the same thing as callable.

[New at pd]

Here's the problem I'm having -- we have definitions for callable bonds, non-callable bonds, non-refundable bonds. Does anyone have a good definition of a refundable bond?

[Exam Slave]

non-callable: cannot be redeemed for any reason. Implies also non-refundable.

non-refundable: cannot be redeemed with refinanced funds. May be redeemed in other ways, depending on its callability provision.

callable: can be redeemed in any way, subject to the provisions.

refundable: can be redeemed with refinanced funds. May be redeemed in other ways, subject to provisions.

With these definitions and the question at hand, III=IV.

[New at pd]

Thanks, exam slave. All of those definitions sound reasonable to me. I guess we agree that III = IV, and thus the question's a little wacky.

[Exam Slave]

no problemo.
Is there anyone official with whom we can register our dissatisfaction?
I might send off a note to Carmody.
Actually, I just did.

[Exam Slave]

Actually, he just replied.

Exact quote:
"I agree this was a vague question at best.
I can't really see the difference between III and IV either. Sorry!"

[New at pd]

Awesome -- you gotta feel good knowing that you're on the same wavelength as Carmody.