Call Privilege

AAA

DEFINITION of 'Call Privilege'

The provision in a bond indenture that gives the bond issuer the option to redeem all or part of the bond issue, at pre-determined prices on certain specified dates. These dates are known as "call dates" and form the call schedule. The term "call privilege" derives its name from the fact that the issuer's option to redeem the bond issue, is akin to a call option on the bonds. In return for this privilege, the issuer will generally pay a coupon rate that is higher than that paid by straight bonds of comparable maturity and credit quality.

INVESTOPEDIA EXPLAINS 'Call Privilege'

The pre-determined price at which a bond can be called is generally higher than the par or issue price. This call premium is demanded by investors to justify the risk involved in holding bonds that have call privileges embedded in them. Since an issuer is quite likely to exercise its call privilege when prevailing interest rates are significantly lower than they were at the time the bond was issued, buyers of callable bonds have to deal with reinvestment risk, or the risk of investing bond proceeds at lower interest rates. In the case of bonds that contain call privileges, "yield to call" may be a better measure of the yields that investors can expect from such bonds, rather than "yield to maturity."

RELATED TERMS
  1. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  2. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity ...
  3. Indenture

    A legal and binding contract between a bond issuer and the bondholders.
  4. Yield To Call

    The yield of a bond or note if you were to buy and hold the security ...
  5. Call Premium

    1. The dollar amount over the par value of a callable fixed-income ...
  6. Callable Bond

    A bond that can be redeemed by the issuer prior to its maturity. ...
RELATED FAQS
  1. A corporate bond I own has just been called by the issuer. How can a company legally ...

    Bond issues can contain what is referred to as a call provision, which is a right afforded to the issuing company enabling ... Read Full Answer >>
  2. How can I create a yield curve in Excel?

    You can create a yield curve in Microsoft Excel if you are given the time to maturities of bonds and their respective yields ... Read Full Answer >>
  3. What are the different formations of yield curves?

    There are three main different formations of yield curves: normal, inverted and flat yield curves. The yield curve describes ... Read Full Answer >>
  4. How does a bond's coupon rate affect its price?

    A bond's coupon rate has a large effect on its market price because it dictates the amount of income the bond generates per ... Read Full Answer >>
  5. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Unlike the Z-spread calculation, the option-adjusted spread takes into account how the embedded option in a bond can change ... Read Full Answer >>
  6. In what ways can a sinking fund affect bond returns?

    The effective yield of a bond sinking fund to an investor should not be considered similar to a bond nonsinking fund. Both ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Bond Call Features: Don't Get Caught Off Guard

    Learn why early redemption occurs and how to avoid potential losses.
  2. Bonds & Fixed Income

    When Your Bond Comes Calling

    Callable bonds can leave investors with a pile of cash in a low-interest market. Find out what you can do about it.
  3. Options & Futures

    Callable Bonds: Leading A Double Life

    Find out more about these dangerous and exciting cousins to regular bonds.
  4. Options & Futures

    Top 4 Strategies For Managing A Bond Portfolio

    Find out how these strategies work and how you can put them to work for you.
  5. Investing Basics

    What is a Nominal Value?

    The nominal value of a security, such as a stock or bond, remains fixed for the duration of its life.
  6. Investing Basics

    Understanding Financial Instruments

    Financial instrument is a general term used to describe a monetary asset.
  7. Professionals

    Why You Should Avoid Fixating on Bond Duration

    Financial advisors and their clients should then focus on a bond fund’s portfolio rather than relying on any single metric like duration.
  8. Mutual Funds & ETFs

    Why You May Want To Be (And Stay) In Bonds

    Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor.
  9. Mutual Funds & ETFs

    How To Short The U.S. Bond Market

    The U.S. bond market has enjoyed a strong bull run over the past few years as the Federal Reserve has lowered interest rates to historic low levels.
  10. Investing

    Why Some Investors Are Tilting Toward TIPS

    Last month’s five-year TIPS auction drew nearly $48 billion in interest, a sign of recent renewed demand for this inflation indexed asset among investors.

You May Also Like

Hot Definitions
  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  4. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  5. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  6. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
Trading Center