What is a 'Doomsday Call'

A doomsday call is a call option added to a bond which allows either the issuer or investor to redeem the bond early. The phrase "DD" on a bond quote indicates if the bond has a doomsday call option.

Despite the gloomy sound of the name, this often has positive connotations because the investor will sometimes exercise this rate when certain conditions are favorable, and they want to cash in when their return is likely to be relatively high.

The doomsday call is also referred to as the Canada call because bonds issued by Canadian corporations often include them. When exercising the call, the issuer pays back the principal and accrued interest before maturity.

BREAKING DOWN 'Doomsday Call'

A doomsday call, when exercised, can reduce the yield of a bond because it shortens the term of the bond and, therefore, decreases the overall interest paid. It is relatively uncommon for a bond issuer to invoke a doomsday call, as it is generally to the issuer’s advantage to allow the bond to continue to maturity. However, if interest rates should decrease significantly, it may be to the issuer’s benefit to exercise a doomsday call. They can then go on to issue new bonds at the lower interest rate.

Nevertheless, the doomsday call provision ensures that the price paid for the bond creates a specific yield for the bondholder and the exercise of one reduces risk since it pays the principal back early.

A doomsday call option can help protect the bondholder because it specifies what the investor will get if the issuer exercises this option. This stipulation usually dictates that the bond will be called at a fixed and predetermined amount. This predetermined amount is either a specific spread over the yield of government bonds or par value, whichever is higher.

The History of the Doomsday Call

While today the term doomsday call is most commonly known as a Canada call, it was once also known by a name, related to the company that first came up with the idea. According to financial industry lore, this call of option got its start when a company named Domtar first issued bonds with the feature in 1987. Domtar is a Canadian manufacturer of paper products. 

Later the option became known as a doomsday call. Some who feel that moniker is too morbid, or contrary, prefer Canada call, a positive name that has caught on.

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