Tuesday, September 8, 2009

call privileges

Nearly all corporate bonds issued today carry call privileges allowing early redemption of the bonds if market conditions prove favorable. The redemption (or "call") price decreases as a callable bond approaches maturity. Depending upon the call premium and market conditions, investors generally prefer that the redemption of a bond be deferred as long as possible to protect them against loss of income from lower interest rates. And most corporate bonds issued today defer the call privilege for 5 to 10 years. The call feature gives the firm greater flexibility in financing its operations but can be expensive to a company when interest rates are high and expected to fall. Investors realize that the bond will likely be called if rates fall far enough and demand a higher yield as compensation for call risk.

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