Bond call

Definition

A bond call is a feature that allows the issuer to repay and retire its bonds before the maturity date. This is often done when interest rates decline, enabling the issuer to refinance at a lower cost.

5 Must Know Facts For Your Next Test

1. Bond calls often occur when interest rates have fallen since the bond was issued.
2. A callable bond typically offers a higher yield than a non-callable bond to compensate for the call risk.
3. Investors face reinvestment risk because they may have to reinvest the called bond's principal at lower interest rates.
4. Call protection periods are time frames during which the issuer cannot call the bond, providing some security for investors.
5. The call premium is an extra amount above par value paid by the issuer when calling a bond before maturity.

Review Questions

• What financial advantage does an issuer gain from calling bonds?
• How does a callable bond differ in terms of yield compared to a non-callable bond?
• What is reinvestment risk in relation to callable bonds?

Related terms

Callable Bond: A type of bond that can be redeemed by the issuer before its maturity date.

Call Protection Period: A pre-defined period during which a callable bond cannot be called by the issuer.

Reinvestment Risk: The risk that proceeds from a called bond will be reinvested at a lower interest rate.