Investor's wiki

Callable Security

Callable Security

What Is a Callable Security?

A callable security is a bond or other type of security issued with an embedded call provision that permits the issuer to repurchase or recover the security by a predetermined date. Since the holder of a callable security is presented to the risk of the security being repurchased, the callable security is generally more affordable than comparable securities that don't have a call provision.

Callable securities are usually found in the fixed-income markets and permit the issuer to shield itself from overpaying for debt, as callable bonds.

Grasping Callable Securities

Typically, a bondholder hopes to receive customary and fixed interest payments on their bonds until the maturity date, at which point the face value of the bond is repaid. A few issuers of fixed-income securities, be that as it may, would like the option to refinance their debt assuming interest rates fall. One method for achieving this is by permitting the issuer to reclaim or "call in" a portion of their bonds early with the goal that they don't have to keep paying higher than market interest rates, subsequently diminishing their cost of borrowing. At the point when bonds are "called" before they mature, interest will as of now not be paid to the investors.

This benefit to issuers, nonetheless, can be inconvenient to investors of callable securities since they, too, will be faced with a lower interest rate environment with which to invest those funds. The conditions for a call provision are laid out in the trust indenture at the time the security is issued.

Call Premium

To repay callable security holders for the reinvestment risk they are presented to and for denying them of future interest income, issuers will pay a call premium. The call premium is an amount over the face value of the security and is paid if the security is recovered before the scheduled maturity date. Put another way, the call premium is the difference between the call price of the bond and its stated par value. For noncallable securities or for a bond recovered right on time during its call protection period, the call premium is a penalty paid by the issuer to the bondholders.

During the initial not many years a call is permitted, the premium is generally equivalent to one year's interest. Contingent upon the terms of the bond agreement, the call premium continuously declines as the current date moves toward the maturity date. At maturity, the call premium is zero.

Call Protection

To give investors an opportunity to make the most of any appreciation in the value of the bonds, callable securities might have a provision known as a call protection. As the name suggests, a call protection shields bondholders from having their securities called by issuers during the beginning phases of a bond's life. Call protection can be incredibly beneficial for bondholders when interest rates are falling, on the grounds that it prevents the issuer from constraining an early redemption on the security. This means that investors will have a base number of years to receive the rewards of the security.

Call Date

The trust indenture likewise records the date(s) a bond can be called right on time after the call protection period closes. This date is alluded to as the call date. There could be one or a number of call dates during the life of the bond. The call date that quickly follows the finish of the call protection is called the primary call date. The series of call dates is known as a call schedule and for every one of the call dates, a particular redemption value is speci\ufb01ed. An issuer might recover its existing bonds on the call date assuming interest rates are positive. In the event that rates and yields rise enough, issuers will probably decide to not call their bonds until a later call date or essentially hold on until the maturity date to refinance.

For instance, expect a callable corporate bond was issued today with a 4% coupon and a maturity date set at a long time from now. Assuming the call protection on the bond is great for a considerable length of time, and interest rates go down to 3% in the next five years, the issuer can't call the bond on the grounds that its investors are protected for quite some time. Nonetheless, on the off chance that interest rates decline following decade, the borrower is justified to trigger the call option provision on the bonds.


  • Issuers of fixed-income securities benefit from a call provision as it permits them to successfully refinance their debt when interest rates fall.
  • Investors in callable securities, then again, are presented to reinvestment risk and are so compensated by partaking in a call premium on these securities.
  • Call protection prevents the issuer from repurchasing in any case callable securities for a certain period of time.
  • Callable securities allude extensively to those securities issued that contain an embedded call option, permitting the issuer to reclaim or repurchase those securities prior to maturity, subject to certain conditions.