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
- Bond calls often occur when interest rates have fallen since the bond was issued.
- A callable bond typically offers a higher yield than a non-callable bond to compensate for the call risk.
- Investors face reinvestment risk because they may have to reinvest the called bond's principal at lower interest rates.
- Call protection periods are time frames during which the issuer cannot call the bond, providing some security for investors.
- 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?
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Study guides (1)
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.
