Investments, tenth edition

  Call Provisions on Corporate Bonds   

Some corporate bonds are issued with call 

provisions allowing the issuer to repurchase the bond at a specified  call price  before the 

maturity date. For example, if a company issues a bond with a high coupon rate when market 

interest rates are high, and interest rates later fall, the firm might like to retire the high-coupon 

debt and issue new bonds at a lower coupon rate to reduce interest payments. This is called 

 refunding.     Callable  bonds    typically come with a period of call protection, an initial time dur-

ing which the bonds are not callable. Such bonds are referred to as  deferred  callable bonds. 

 The option to call the bond is valuable to the firm, 

allowing it to buy back the bonds and refinance at lower 

interest rates when market rates fall. Of course, the firm’s 

benefit is the bondholder’s burden. Holders of called 

bonds must forfeit their bonds for the call price, thereby 

giving up the attractive coupon rate on their original 

investment. To compensate investors for this risk, call-

able bonds are issued with higher coupons and promised 

yields to maturity than noncallable bonds.