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.

BREAKING DOWN '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."

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