What is a 'Provision'

A provision is a legal clause or condition contained within a contract that requires one or both parties to perform a particular requirement by some specified time or prevents one or both parties from performing a particular requirement by some specified time. For example, the anti-greenmail provision contained within some companies' charters protects shareholders from the board wanting to pass stock buybacks.


Although stock buybacks can be a good thing for shareholders, some buybacks allow board members to sell their stock to the company at inflated premiums. Provisions protect the interests of one or both parties in a contract. The following are examples of provisions.

Sunset Provision

A sunset provision automatically repeals a law or statute on a specific date, unless legislators or company executives reenact the law or statute. For example, a sunset provision in an insurance policy limits a claimant’s time for claim submission on a policy. If the claimant does not act within the defined period, rights to make a claim are forfeited.

Sunset Provision and the USA Patriot Act

According to the USA Patriot Act, the National Security Agency’s authority for collecting bulk telephone metadata, including who calls whom when, expired at midnight June 1, 2015. As a result, the government has fewer methods of preventing terrorism. Although Senate Majority Leader Mitch McConnell sought a two-week extension of two less-controversial provisions of the Patriot Act, Senator Rand Paul of Kentucky objected to the surveillance programs, citing violations of the Constitution. The two other programs involved roving wiretaps that helped the Federal Bureau of Investigation (FBI) use warrants when tracking terrorism suspects who frequently switch cellphones, and a never-used program for monitoring potential lone wolf suspects not tied to terrorist groups. Any investigations started before the sunset were allowed continuance.

Call Provision

A bond’s call provision is a specific date after which the company may call bonds. Investors turn in the bonds for the face amount or the face amount plus a premium. For example, a 12-year bond issue is callable after five years. The five years until the bond can be called is the hard call protection. Investors earn interest paid by the bond until at least the first call date. When an investor buys a bond, the broker typically provides the yield to call as well as the yield to maturity, showing the bond’s investment potential.

If a bond has a soft call provision, the provision goes into effect after the hard call provision passes. Soft call protection is typically a premium to par that the issuer pays for calling the bond before maturity. For example, after reaching the call date, the issuer pays a 3% premium for calling the bonds for the next year; a 2% premium the following year; and a 1% premium for calling the bonds more than two years after the hard call expires.

  1. Sunset Provision

    A clause in a statute, regulation or similar piece of legislation ...
  2. Make Whole Call (Provision)

    A type of call provision on a bond allowing the borrower to pay ...
  3. Any-Interest-Date Call

    A municipal bond provision which allows the bond issuer to redeem ...
  4. Hard Call Protection

    The period in the life of a callable bond during which the issuing ...
  5. General Provisions

    A balance sheet item representing funds set aside by a company ...
  6. Call Privilege

    The provision in a bond indenture that gives the bond issuer ...
Related Articles
  1. Managing Wealth

    Bond Call Features: Don't Get Caught Off Guard

    Learn why early redemption occurs and how to avoid potential losses.
  2. Managing Wealth

    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. Markets

    Why Bad Bonds Get Good Ratings

    Credit ratings are not the only tool to rely on when assessing bonds. Find out why they sometimes fall short.
  4. Managing Wealth

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  5. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Bonds

    What they are: Debt securities in which you lend money to an issuer (such as a corporation or government) in exchange for interest payments and the future repayment of the bond’s face value. ...
  6. Markets

    Banks Helped By Lower Loan Loss Provisions

    Many banks saw improved credit quality in the first quarter of 2011 leading to lower loan loss provisions.
  7. Managing Wealth

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  8. Managing Wealth

    A Guide to High Yield Corporate Bonds

    The universe of corporate high yield bonds encompasses multiple different types and structures.
  9. Markets

    What is a Loan Loss Provision?

    Banks set aside loan loss provisions to cover losses from bad loans.
  10. Markets

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  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 Answer >>
  2. What does it mean when a bond has a put option?

    A put option on a bond is a provision that allows the holder of the bond the right to force the issuer to pay back the principal ... Read Answer >>
  3. What's the difference between accrued expenses and provisions?

    Read about the differences between accrued expenses and provisions, and why a company might record one over the other in ... Read Answer >>
  4. What happens to the price of a premium bond as it approaches maturity?

    Learn how bonds trade in regard to premiums and discounts, and how bond prices shift closer to par value as bonds approach ... Read Answer >>
  5. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  6. What are the risks of investing in a bond?

    The most well-known risk in the bond market is interest rate risk - the risk that bond prices will fall as interest rates ... Read Answer >>
Hot Definitions
  1. Poison Pill

    A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make ...
  2. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  3. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  4. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  5. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  6. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
Trading Center