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.