What does a call provision call feature allow bond issuers to do and why would they do it?

Category: personal finance options
4.1/5 (2,343 Views . 44 Votes)
A call provision is a provision on a bond or other fixed-income instrument that allows the issuer to repurchase and retire its bonds. Bonds with a call provision pay investors a higher interest rate than a noncallable bond. A call provision helps companies to refinance their debt at a lower interest rate.

Then, what does the call provision for a bond entitle the issuer to do?

A call provision grants the issuer the right to retire the debt, fully or partially, before the scheduledmaturity date. The right to call an obligation is included in most loans and therefore in all securities created from such loans.

Beside above, who benefits from a call provision on a corporate bond? A call provision allows an issuer to pay a bond early. Most bonds have a fixed maturation and value. If you buy a 10-year bond, you get back your capital plus a fixed interest rate in a decade. Call provisions are an exception to this rule.

Also to know, what is a Call privilege?

call privilege. In securities trading, stipulation in a bond indenture that gives its issuer the right to redeem the outstanding bonds at a certain price, on one or more specified call dates.

What is a put provision?

A put provision is a provision in some bonds which allows the bondholder to resell a bond back to the bond's issuer at par or the face value of the bond before the bond matures.

39 Related Question Answers Found

What is a make whole call?

A make-whole call provision is a call provision attached to a bond, whereby the borrower must make a payment to the lender in an amount equal to the net present value of the coupon payments that the lender will forgo if the borrower pays the bonds off early.

What are the benefits to a company from including a call provision What are the costs?

There are various benefit associated to call provision but the two main benefits are those of; the company taking advantage of the declines in interest rates through calling in an issue and later replacing it with a low token issue and the second benefit is that of doing away with a covenant due to the same reasons.

What is the purpose of a deferred call?

Deferred call. A provision that prohibits the company from calling the bond before a certain date. During this period the bond is said to be call protected.

What is a bond indenture what provisions are usually included in it?

What provisions are usually included in it? A bond indenture is the contract between the bond's issuer and the bondholder. The face value of the bond, the interest rate, the interest payment dates, and the maturity date will most likely be. recorded on the bond indenture.

When should I call Bond?

Issuers call bonds when interest rates drop below where they were when the bond was issued. For example, if a bond is issued at a rate of 7% and the market rate for bonds of that type drops to 6% and stays there, when the bond becomes callable the issuer will likely call it in order to issue new bonds at 6%.

What's the difference between a call for sinking fund purposes and a refunding call?

7-11 A call for sinking fund purposes is quite different from a refunding call. A sinking fund call requires no call premium, and only a small percentage of the issue is normally callable in a given year. A refunding call gives the issuer the right to call all the bond issue for redemption.

What is the biggest risk to an investor in a bond with call provisions?

What is the biggest risk to an investor in a bond with call provisions? (A) The issuer may not have sufficient funds on the call date. (B) The yield curve may be positively sloped on the call date. (C) The yield curve may be negatively sloped on the call date.

Why does a call provision in a bond increase reinvestment risk?

First, they present reinvestment risk. When interest rates fall, the bond issuer is more likely to exercise the call provision in order to retire what has become high-interest debt and reissue the debt at the prevailing lower rate.

What is an example of privilege?

Privilege, as understood and described by researchers, is a function of multiple variables of varying importance, such as race, age, gender, sexual orientation, gender identity, citizenship, religion, physical ability, health, level of education, and others.

What is the difference between a right and a privilege?

A privilege is a certain entitlement to immunity granted by the state or another authority to a restricted group, either by birth or on a conditional basis. By contrast, a right is an inherent, irrevocable entitlement held by all citizens or all human beings from the moment of birth.

What makes something a privilege?

Privilege, by definition, is "a right, immunity or benefit enjoyed only by one person beyond the advantages of most." Basically, to have privilege is to have an advantage that is completely out of your control.

How does privilege work?

Privilege exists when one group has something of value that is denied to others simply because of group membership and not based on what a person or group has done or failed to do (Johnson, 2006). For those who routinely benefit from privilege, the challenge is to not quickly deny its existence.

Is Privilege an adjective?

adjective. belonging to a class that enjoys special privileges; favored: the privileged few. entitled to or exercising a privilege.

What does it mean to call a bond?

Callable or redeemable bonds are bonds that can be redeemed or paid off by the issuer prior to the bonds' maturity date. When an issuer calls its bonds, it pays investors the call price (usually the face value of the bonds) together with accrued interest to date and, at that point, stops making interest payments.

What is a privilege in law?

In the law of evidence, a privilege is a rule of evidence that allows the holder of the privilege to refuse to disclose information or provide evidence about a certain subject or to bar such evidence from being disclosed or used in a judicial or other proceeding.

Is education a privilege?

Access to education is not a privilege, it's a right. It is not only important for economic reasons but also because we have a commitment to children to fulfill their right to education. This means that we have to find ways to include the children that are currently out of school.

How do you explain privilege to a child?

A privilege is something your child likes or enjoys. A right is something your child needs. For example, children have a right to things like food, water and the feeling of being loved. But getting to watch TV or play at a friend's house is a privilege.