Provision

What is a 'Provision'

A provision is a stipulation in a contract or legal document often requiring action by a specific date or within a specified period. Provisions protect the interests of one or both parties in a contract. 

BREAKING DOWN 'Provision'

Provisions provide protection and specify deadlines for actions. Provisions can be found in the laws of a country, in loan documents, and in investment-grade bonds and stocks. For example, the anti-greenmail provision contained within some companies' charters protects shareholders from the board passing stock buybacks. Although most shareholders favor stock buybacks, some buybacks allow board members to sell their stock to the company at inflated premiums. 

A loan loss provision is an expense set aside as an allowance for uncollected loans and loan payments. This provision is used to cover a number of factors associated with potential loan losses including bad loans, customer defaults and renegotiated terms of a loan that incur lower than previously estimated payments. 

Sunset Provision in the Law

A sunset provision automatically repeals a law or statute on a specific date, unless legislators or company executives reenact the law or the statute. For example, a sunset provision in an insurance policy limits a claimant’s time to submit a claim for a covered risk. If the claimant does not act within the defined period, they forfeit their right to make a claim.

According to the USA Patriot Act, the National Security Agency’s authority for collecting bulk telephone metadata expired at midnight on June 1, 2015. Other monitoring programs involved roving wiretaps, which helped the Federal Bureau of Investigation (FBI) use warrants when tracking terrorism suspects who frequently switch cell phones, and a plan for monitoring potential lone wolf suspects not affiliated with terrorist groups. Any investigations started before the sunset was allowed to continue. Many sunset portions fo the Patriot Act found extension through 2019 with the USA Freedom Act. However, the collection of massive phone data by government agencies was replaced with a provision that this data to be held by the phone providers.

Call Provision for Bonds

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. This five years period is the hard call protection. Investors will earn interest from 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. These two yields show the bond’s investment potential.

If a bond has a soft call provision, the procedure will go into effect after the hard call provision period passes. Soft call protection is typically a premium to par value which 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.