Call Provision

A Call Provision is a feature of a bond or other fixed-income security that allows the issuer to redeem the security before it matures. This provision typically specifies a call price or call schedule at which the security can be redeemed by the issuer.

Example #1

For example, if an investor holds a bond that has a call provision at a call price of $1,100, the issuer can choose to buy back the bond from the investor for $1,100 before the bond's maturity date.

Example #2

Another example is a callable bond with a call schedule that allows the issuer to redeem the bond at specified dates and prices, providing flexibility to manage debt obligations.

Misuse

Misuse of a call provision can disadvantage investors by unexpectedly terminating a fixed-income investment. For instance, if an investor purchases a bond counting on a steady stream of interest payments until maturity, the issuer exercising the call provision prematurely can disrupt the expected income flow for the investor. Therefore, it's essential to carefully consider the presence of call provisions when investing in fixed-income securities.

Benefits

One benefit of a call provision is that it enables issuers to manage their debt effectively by refinancing at lower interest rates when market conditions are favorable. This can lead to cost savings for the issuer and potentially result in higher returns for investors in the future.

Conclusion

Understanding call provisions is crucial for investors in fixed-income securities as it impacts the investment's potential returns and risks. By being aware of call provisions, investors can make informed decisions about their investments and consider factors like call prices and schedules in their investment strategy.

Related Terms

BondsMaturity DateCallable Bond