BROWSE

Call Provision

What is a 'Call Provision'

A call provision is a provision on a bond or other fixed-income instrument that allows the original issuer to repurchase and retire the bonds. If there is a call provision in place, it typically comes with a time window under which the bond can be called, with a specific price to be paid to bondholders, and any accrued interest defined within the provision.

Explaining 'Call Provision'

Functioning as a clause within a bond indenture, a call provision secures rights for the issuer in the event they wish to buy back a portion of an issue before maturity. If a call provision is used, the issuer may exercise this right on only some of the bonds associated with an issue or may recall the issue in its entirety. Callable bonds pay a higher yield than comparable non-callable bonds to compensate for the presence of the provision.

Understanding Bonds as Investment Mechanisms

By purchasing a bond, the investor has created a long-term source of cash flow. Bonds pay interest, expressed as a percentage, at specific intervals throughout the year. These interest payments are made to the investor in exchange for the amount invested when the bond was purchased. Once the bond reaches maturity, the issuer pays the investor any remaining interest due and returns an amount equal to the face value of the bond as a repayment of the initial amount invested.

Benefits of a Call Provision to the Issuer

When a bond call is made, it almost always favors the issuer over the investor. Typically, call options on bonds are exercised by the issuer when interest rates have fallen. The reason for this is that the issuer can simply issue new debt at a lower rate of interest, effectively reducing the overall cost of the borrowing, instead of continuing to pay the higher effective rate on the borrowing.

Benefits and Risks to Investors

Since the bond can be called at any time during the agreed-upon time period, the risk exists that the investor will lose the long-term benefits of holding the bond if the call provision is exercised. While the investor will not lose any money in terms of the amount originally invested, the investor does lose the future interest payments that would have been due had the bond been held until maturity. If the investor chooses to reinvest the funds in another bond, he may not be able to secure an interest rate comparable to the one held previously.


Further Reading


Future investment opportunities and the value of the call provision on a bond
www.jstor.org [PDF]
… These potential problems are avoided by having the call provision … "Interest Rate Uncertainty and the Value of Bond Call Protection," Journal of … 538-539. 9. . "Determinants of Corporate Borrowing," Journal of Financial Economics, Volume 5, Number 2 (November 1977), pp …

Future investment opportunities and the value of the call provision on a bond: CommentFuture investment opportunities and the value of the call provision on a bond: Comment
www.jstor.org [PDF]
… These potential problems are avoided by having the call provision … "Interest Rate Uncertainty and the Value of Bond Call Protection," Journal of … 538-539. 9. . "Determinants of Corporate Borrowing," Journal of Financial Economics, Volume 5, Number 2 (November 1977), pp …

Indexing a bond's call price: an analysis of make-whole call provisionsIndexing a bond's call price: an analysis of make-whole call provisions
www.sciencedirect.com [PDF]
… These potential problems are avoided by having the call provision … "Interest Rate Uncertainty and the Value of Bond Call Protection," Journal of … 538-539. 9. . "Determinants of Corporate Borrowing," Journal of Financial Economics, Volume 5, Number 2 (November 1977), pp …

On the call provision in corporate zero-coupon bondsOn the call provision in corporate zero-coupon bonds
www.jstor.org [PDF]
… These potential problems are avoided by having the call provision … "Interest Rate Uncertainty and the Value of Bond Call Protection," Journal of … 538-539. 9. . "Determinants of Corporate Borrowing," Journal of Financial Economics, Volume 5, Number 2 (November 1977), pp …

Why firms issue convertible bonds: the matching of financial and real investment optionsWhy firms issue convertible bonds: the matching of financial and real investment options
www.sciencedirect.com [PDF]
… These potential problems are avoided by having the call provision … "Interest Rate Uncertainty and the Value of Bond Call Protection," Journal of … 538-539. 9. . "Determinants of Corporate Borrowing," Journal of Financial Economics, Volume 5, Number 2 (November 1977), pp …

What Do We Learn from Call Provision Terms?What Do We Learn from Call Provision Terms?
papers.ssrn.com [PDF]
… These potential problems are avoided by having the call provision … "Interest Rate Uncertainty and the Value of Bond Call Protection," Journal of … 538-539. 9. . "Determinants of Corporate Borrowing," Journal of Financial Economics, Volume 5, Number 2 (November 1977), pp …

The Call Provision of Corporate Bonds: A Standard Form in Need of ChangeThe Call Provision of Corporate Bonds: A Standard Form in Need of Change
heinonline.org [PDF]
… These potential problems are avoided by having the call provision … "Interest Rate Uncertainty and the Value of Bond Call Protection," Journal of … 538-539. 9. . "Determinants of Corporate Borrowing," Journal of Financial Economics, Volume 5, Number 2 (November 1977), pp …

An application of the option pricing models to the valuation of the call provision on a US Treasury bond and the term structure estimation.An application of the option pricing models to the valuation of the call provision on a US Treasury bond and the term structure estimation.
elibrary.ru [PDF]
… These potential problems are avoided by having the call provision … "Interest Rate Uncertainty and the Value of Bond Call Protection," Journal of … 538-539. 9. . "Determinants of Corporate Borrowing," Journal of Financial Economics, Volume 5, Number 2 (November 1977), pp …



Q&A About Call Provision


How does a bond with a call provision pay higher coupon interest rate than noncallable bonds?

Bonds with the call provision pay higher coupon interest rate because they are more risky for investors.

Why do issuers exercise their call provisions?

Issuers typically exercise their call provisions when interest rates have fallen.

How can an investor avoid losing money with a bond's call provision?

An investor can reinvest in another bond, but this may not be possible depending on market conditions at that time.

When does an investor lose money with a bond's call provision?

The investor loses money if the bond is called before maturity.

Are there any risks associated with owning bonds that have a call feature?

Yes, there are risks associated with owning bonds that have a call feature.

What happens to an investor who owns a bond with a call provision in rising rate environments?

In rising rate environments, the bond may pay below-market interest rates.

When can companies exercise their call provisions?

Companies can exercise their call provisions when interest rates fall.

What is a call provision?

A call provision is a provision on a bond or other fixed-income instrument that allows the original issuer to repurchase and retire the bonds.

What is the call provision?

The call provision allows companies to refinance their debt when interest rates fall.

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