Call PriceExplained & Defined
What is a Call Price?
A Call Price or a Redemption Price is a price wherein the bond issuer or the preference share issuer may repurchase the issued shares before their maturity.
The call price is set upon its issuance, mentioned in the prospectus of the issue.
Understanding the Call Price
The Call Price method can be specifically implemented with Callable Securities.
These are agreed-on prices by both parties to prevent a loss on the part of the issuer when the market price of interest rates changes.
For example, Company A issued bonds to an investor at a coupon rate of 8%.
At the time of issuance, the interest is 8% but when the interest rate drops to 5% (the call price), the issuer of the bond may use the repurchase or call option on the bond.
A higher trading price is paid by the issuer of the bonds to investors in order to compensate them for their exposure to reinvestment risk and the missed opportunity of earning future interest income.
Issuers pay investors a Call Premium, which is the difference between the call price and the par value.
For callable securities, the call premium is an amount in excess of the security’s face value that is paid when it is redeemed before its maturity date.
However, when noncallable securities are redeemed earlier than their call protection period, the call premium paid to bondholders is called a penalty.
All terms and conditions regarding the sale of bonds, repurchase, and other transaction agreements can be seen in a piece of paper called the bond indenture.
The general details you may see in a bond indenture are the conditions for the buy-back agreement, face value, percentage due, and other information concerning the terms and conditions of the bond issue.
Most of the time, the issuer executes the call before the maturity of the bonds, allowing the issuer to have an opportunity for debt refinancing at a lower rate.
A call price’s terms will also indicate the period when the issuer can exercise the call option including when the security is noncallable and bondholders no longer have to sell it back.
Initially, bonds are categorized as non-callable for a certain period and then become callable.
Most of the time, issuers gain economic savings from exercising a call option on the callable securities at the expense of the investor.
Once a call option is exercised, the issuer no longer has an obligation to make interest payments past the call date.
One way for common shareholders to increase their earnings is for companies to exercise their right to call preferred stocks to stop paying the dividends on preferred shares.
For example, ABC Corporation issues 50,000 preferred shares with a face value of $75 and a $100 call provision. I
f ABC Corporation were to exercise its right to call preferred shares, it may do so at a call price of $100 per share.
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