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Looking at the price of bonds for a bank left me a bit puzzled.

If I take the two following bonds:

  • UBS 7.125% Perpetual Corp (USD)
  • UBS 6.875% Perpetual Corp (USD)

It seems that the one with the higher coupon would cost more, as it gives more money than the one with lower coupon, and the issuer is the same. However, checking online the price of the 7.125% coupon is around 103US$, while the one at 6.875% is around 110US$.

Why is it so? The data have been updated recently, so there should be some liquidity on those bonds. The interest payment is similar (3 days delay, early Aug).

Additionally, the Coupon is defined as "Variable", while the name indicates a fixed quantity interest rate.

2 Answers 2

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You'd have to look at the details of the bonds to see any other differences (specifically the vague reference to "variable"), but there could be several factors that could make the lower coupon more expensive:

  • Fixed vs variable interest rate
  • being callable or putable (callable bonds are cheaper, putable more expensive in general)
  • being convertible (e.g. to the issuer's equity)
  • credit risk of the issuer (a bond from an issuer more likely to default will be cheaper)

The first three items are available from the prospectus - the 4th is not directly measurable and must be inferred from prices of other bonds guaranteed by the issuer.

The timing of payments shouldn't make that much difference, especially for perpetuals. The only way this would make a difference is if there's a huge jump in the risk of default between the interest payments of the two bonds, which would be unusual.

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  • Thank you for your answer, I see no real difference between the bonds. Both are "variable" (with fixed interest rate??). Both bonds are callable. Both are not converible. The issuer is the same, so credit risk is the same for both bonds.
    – K. Do
    Oct 5, 2020 at 14:26
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    The interest rate may be fixed for a period of time then reset at some point. So the more expensive one may reset to a higher rate in the future.
    – D Stanley
    Oct 5, 2020 at 14:31
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    Ah I see, one is set to reset in 2025, while the cheaper one will reset in 2021. I think that's the right answer here. Thank you!
    – K. Do
    Oct 5, 2020 at 14:36
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    Right - so the more expensive one is expected to reset to a higher rate 4 years later.
    – D Stanley
    Oct 5, 2020 at 14:37
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Referring to UBS bondholder information, I see two possible bonds that fit the description:

The 7.125 bond is first callable on 2021-08-10, while the 6.875 bond is first callable on 2025-08-07. The 7.125 bond has a higher yield to maturity than the 6.875 bond. However, because the 7.125 bond can be called much earlier, the 7.125 bond has a lower yield to worst than the 6.875 bond. In order for the 7.125 bond to compensate for its lower yield to worst, it has a lower price.

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  • One bond is callable earlier (the 7.125% one), but its reset date is also set earlier (2021). While the other one is callable later, and its reset date is in 2025. Would the price difference comes from the different callable dates, or the reset dates? (Or both?)
    – K. Do
    Oct 5, 2020 at 16:12
  • @K.Do Could you ask DStanley? I am not knowledgeable enough to answer your question.
    – Flux
    Oct 5, 2020 at 16:22
  • @K.Do Since the bonds are trading above par, the likelihood of getting called is very high, so that's probably driving the pricing more than the reset rate. Unless the rate at reset is lower than market, the bond will likely be called, so the price is reflecting a much longer period for the lower coupon (since the higher coupon bond will get called sooner).
    – D Stanley
    Oct 5, 2020 at 18:14

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