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. Yield To Maturity (YTM)

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

    A legal and binding contract between a bond issuer and the bondholders. ...
  3. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  4. Forced Conversion

    The occurrence of an issuer of a convertible security exercising ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  6. Call Premium

    1. The dollar amount over the par value of a callable fixed-income ...
Related Articles
  1. Bond Call Features: Don't Get Caught ...
    Bonds & Fixed Income

    Bond Call Features: Don't Get Caught ...

  2. When Your Bond Comes Calling
    Bonds & Fixed Income

    When Your Bond Comes Calling

  3. Callable Bonds: Leading A Double Life
    Options & Futures

    Callable Bonds: Leading A Double Life

  4. Top 4 Strategies For Managing A Bond ...
    Options & Futures

    Top 4 Strategies For Managing A Bond ...

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center