Objective:
Students will explore the concept of callable bonds, analyze the benefits and risks for both issuers and investors, and understand the strategic decisions surrounding their use.
Materials Needed:
- Handouts summarizing callable bonds and key financial terms.
- Examples of callable bonds in real-world financial markets.
Lesson Steps:
1. Introduction (10 minutes):
- Define callable bonds: Bonds that can be redeemed (called) by the issuer before the maturity date.
- Introduce key terms:
- Issuer: The party offering the bond (e.g., a corporation or government).
- Investor: The bondholder who earns interest in exchange for lending money.
- Call price: The amount paid by the issuer to repurchase the bond.
- Call protection period: The time during which the bond cannot be called.
- Explain the purpose: Issuers use callable bonds to refinance debt at lower interest rates if market conditions improve.
2. Viewing Clip (5 minutes):
- Show the Game of Thrones clip where callable bonds are discussed, highlighting the strategic use of financial instruments.
- Set the context: Relate the medieval financial negotiations to modern bond markets, emphasizing the trade-offs involved in callable bonds.
3. Group Discussion (10 minutes):
- Divide students into small groups to discuss:
- What advantages do callable bonds provide to issuers?
- Why might callable bonds pose risks to investors?
- How does the scenario in Game of Thrones mirror real-world financial strategies?
4. Concept Application (20 minutes):
- Case Study Analysis:
- Provide examples of callable bonds used by governments or corporations.
- Ask students to analyze:
- Why the issuer chose a callable bond over other financial instruments.
- How investors weigh the trade-offs of higher yields versus call risk.
- How callable bonds affect market dynamics (e.g., interest rate changes).
- Highlight the role of callable bonds in financial flexibility and cost management.
5. Wrap-Up and Reflection (10 minutes):
- Summarize the benefits and challenges of callable bonds:
- For issuers: Financial flexibility, potential cost savings.
- For investors: Higher yields but increased risk of early redemption.
- Pose a reflective question: How might callable bonds influence your investment strategy or understanding of financial markets?
6. Activity or Homework (15 minutes):
- Callable Bond Simulation:
- Split students into two groups: issuers and investors.
- Issuers design two bonds representing loans made over a 3-year time horizon.
- One bond (Bond A) is not callable.
- The other (Bond B) will be callable.
- Beginning with the non-callable bond, have the two groups negotiate an acceptable interest rate.
- Then, the two groups set terms (rate, call protection period) for the callable bond.
- Facilitate a discussion after the simulation, evaluating the decisions made by each side.
- Analyze any differences between the two bonds. Did students negotiate a call premium (a higher overall rate of return for the callable bond)? If so, why?