Call Price
A price at which a bondholder can be forced to sell the bond back to the issuer.
A call price is a price at which a bondholder can be forced to sell the bond back to the issuer. A call happens before the maturity date of the bonds since the issuer can refinance the debt at a cheaper interest rate.
This is the face value of the bond. The measure of the call price and the dates during which it can be authorized are specified in the indenture agreement associated with the bond.
The bond issuer with this will have to accept a lower price to atone investors for risking a loss of income if the bonds are called. It can also be known as a “redemption price”.
In other words, this price refers to the specific price that a preferred stock or a bond issuer would pay buyers if they choose to redeem callable security before the maturity date.
Callable securities allow preferred stock or bond issuers to buy back the issued security at a specified price. This price, as stated before, is called the call price, and it is executed when there is a positive and significant change in the market price or interest rate.
Concept Explained
This price is usually associated with callable securities. Callable securities can be bonds or preferred shares. Callable securities have an in-built call option that permits the issuer to repurchase them before maturity.
Callable securities are established in the fixed-income markets and allow issuers to look after themselves from overpaying for debt by buying the securities at a predetermined price if the market changes.
Call price benefits the issuer, not the investors. These types of securities trade at a higher price to atone callable security holders for reinvestment risk and to strip them of future interest incomes. After this, issuers will pay what is called a call premium.
A call premium is the difference between the actual value and the call price. The issuing company would offer a call premium to the investors to reimburse them for the risks of early redemption.
Issuing companies will also offer higher interest rates on callable bonds and more dividends on callable preferred stocks to make them more appealing to investors.
Callable Bonds Explained
A callable bond is a bond the issuer may redeem before it reaches the stated maturity rate displayed on it. Callable bonds allow the issuing company to pay off its debt early, allowing them to benefit from cheaper interest rates.
Any business may call their bond if interest rates move lower, allowing them to borrow them again at a more beneficial rate. In addition, callable bonds compensate investors better by offering them a more attractive interest rate or coupon rate due to their essence.
Callable bonds are also typically called at a value slightly above the debt’s par value. For instance, businesses or corporations may issue bonds to pay off their debts or to plan further company expansion.
If corporations or businesses expect market interest rates to fall, they may issue their bonds as callable. By issuing their bonds as callable, they allow them to make early redemption and sell other financings at a lower rate.
On the other hand, call schedules are resolved during issuance. Calls may be done at any time, one time only, or only on specific dates. The majority of bonds are callable at face value plus accrued interest.
Example
Using the examples below, we will understand the concept better.
ABC company is issuing callable bonds to investors with a maturity period of 10 years at a 10% interest rate. The face value of the bond is $200. The bond indenture specifies the call provision, such as call prices, call dates, and the terms and conditions of the redemption.
ABC terms included in the indenture state that ABC can call or redeem preferred stocks or bonds in the third, sixth, and ninth years respectively. ABC issued the bonds in 2012, so it can buy them back in 2015, 2018, and 2021.
The call price of the bond for these years is:
- $250 (2015),
- $230 (2018), and
- $220 (2021).
Accordingly, if ABC wants to repurchase its shares in the year 2018, then it must buy back the shares at the call price of $230.
In this case, ABC has to offer $30 as a call premium. The bondholders will receive $30 as a call premium and can refinance their debt at a lower rate.
Call Premium = Call Price – Face value of the Bond
= $230 – $200 = $3
Call Premium and price
Callable securities are only found in fixed-income markets. Callable securities allow the issuers to buy back the issued security at a price if there is a change in the market price or the interest rate.
Therefore, this price is called call price, and callables protect issuers from increasing interest rates.
For instance:
- ABC company issues one bond that pays a fixed coupon at 4%, and the interest rate is also 4%.
- ABC will use the call option to buy back the bond if the interest rate decreases to 2.5%.
- Therefore, it can refinance the debt and save 1.5% on interest payments.
The call option will favor the issues and not the buyers; the bonds sell at a high premium to refund the bondholders for their risk and potential interest income. A call premium must be paid to bondholders to compensate them.
A call premium should always be higher than the bond’s face value. Also, if I want to withdraw non-callable security early, they will be steep penalties for you to withdraw them early.
Non-callable securities may also turn into callable securities after a period of time. For example, when a company or business calls back a bond, it will make a significant economic gain in interest gains.
FAQs
In finance, a call option is a derivative contract that will give the owner the right. Still, it is not obligated to purchase a specific amount of an underlying security at a specific price within a specific time.
The call price is known to be the actual price of a share that is traded in a financial market. Par value is the normal value of a particular share printed on the paper and the faces of the specific share.
Usually, the call price and the par value would differ due to the share premium or discount.
“Call” in finance is when you acquire a stock. Owning a call option gives you the right to “call” away stock from a different investor.
On the other hand, the opposite of a call option is called a “put option” a “put option” is the right to sell your stock at a specific price during a specific period of time.
A call option writer makes a profit from the premium that they have received for wiring the contract and getting into the position. The premium is the price the buyer paid for the agreement.
Therefore, a call option makes money if the security price is above the option's strike price.
The call option would allow the buyer to purchase underlying shares at the strike before the contract expires. When an investor sells a call option, this transaction is called a short call.
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