the call privilege

nearly all corporation bonds and mortgages and some U.S. government bonds issued in today‘s financial markets carry call privilege. this provision of the bond contract, or indenture, permits the borrower to retire all or a portion of bond issue by buying back the securities in advance of their maturity. Bondholders usually are informed of a call through a notice in a newspaper of general circulation, while holders of record of registered bonds are notified directly. Normally, when the call privilege is exercised, the security issuer will pay the investor the call price, which equals the securities‘ face value plus a call penalty. the size of the call penalty is set forth in the indenture (contract) and generally varies with the number of years remaining to maturity. in case of a bond, one year‘s worth of coupon income is often the minimum call penalty required.