Breaking Down Call Price
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.
A company may 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.
What the Call Price Means to 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.
When companies or government entities issue bonds, they may be able to pay off their debts in advance. A call price is included with the terms for the bonds they issue to allow them to buy them back, and then offer bonds at a lower price.
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.