What Is a Call Price?
The call price (also known as "redemption price") is the price at which the issuer of a callable security has the right to buy back that security from an investor or creditor. Call prices are commonly found in callable bonds or callable preferred stock. The call price is set at the time the security is issued and is known by reading the issue's prospectus.
- The call price is the pre-determined price at which the issuer of a callable security is able to redeem them from investors.
- Because callable securities generate additional risk for investors, bonds or shares with call prices will trade at a higher price than otherwise, known as the call premium.
- Issuers of bonds or preferred shares may use a call price to refinance lower interest rates if market conditions turn favorable.
Understanding the Call Price
Callable securities are commonly found in the fixed-income markets and allow the issuer to protect itself from overpaying for debt by allowing it to buy back the issue at at a pre-determined price if interest rates or market prices change. This pre-determined price is the call price. For instance, if a company issues a bond paying a fixed coupon of 5% when interest rates are also 5%, they can use a call option to redeem that bond if interest rates drop to, say, 3% in order to be able to refinance their debt.
Because the call option benefits the issuer and not investors, these securities trade at higher prices to compensate callable security holders for the reinvestment risk they are exposed to and for depriving them of future interest income. Issuers therefore will pay a call premium. The call premium is an amount over the face value of the security and is paid in the event that the security is redeemed before the scheduled maturity date. Put another way, the call premium is the difference between the call price of the bond and its stated par value. For noncallable securities or for a bond redeemed early during its call protection period, the call premium is a penalty paid by the issuer to the bondholders.
The establishment of a call price and the timeframe when it may be triggered are usually detailing in a bond’s indenture agreement. This allows the issuer of the bond to demand the holder to sell back the bond, usually for its face value, along with any agreed upon percentage due. This premium could be set at interest for one year. Depending on how the terms are structure, that premium may shrink as the bond matures due to the amortization of the premium.
Typically, a call will take place before a bond reaches its maturity, especially in instances where the issuer has an opportunity to refinance the debt the bond covers at a lower rate. The terms of the call price may stipulate a timeframe when the issuer can exercise it, along with periods when the security is non-callable, and the bondholder cannot be compelled to sell it back.
Some bonds are non-callable for an initial period of time, and then they become callable. When a company calls a bond issue, it is almost always the case that the company makes substantial economic savings in terms of future interest payments, at the expense of the bond investor who will be forced to reinvest his or her money at a lower interest rate. Once a bond has been called, the issuer has no legal obligation to make any interest payments after the call date.
A company may also exercise its right to call preferred stock if it wishes to discontinue payment of the dividend associated with the shares. It may choose to do this to increase earnings for common shareholders.
For example, let's say the TSJ Sports Conglomerate issues 100,000 preferred shares with a face value of $100 with a call provision built in at $110. This means that if TSJ were to exercise its right to call the stock, the call price would be $110.