If you've ever taken out a loan and paid it off early, you've executed a fixed income full call. Calls -- most commonly executed in bonds -- are a way for issuers to pay off their debt earlier than they initially planned. There are many reasons for a company to call a bond, but the end result is the same: You get your money back.
What is a Call?
Bonds are loans. When you purchase a bond, you are loaning the issuer the principal cash you paid to own shares -- also known as par -- usually $1 per share. The issuer pays you interest over the life of the bond and repays your principal on the maturity date. In some cases, the issuer chooses to pay some or all of the bond off early. This is known as a call.
Full vs. Partial Call
Bond issuers can make two types of calls: full or partial. A full call means that it is paying off the bond in its entirety, and all of the people who own shares of the bond will receive their principal back. A partial call means that the issuer is paying off a portion of the bond -- shareholders will receive some of their principal back but will retain some of their shares for redemption at a later date. In either case, the bond issuer will pay any interest owed on the bond through the call date along with returning the principal.
Why Do Bonds Get Called?
Bonds are called for all the same reasons you might have to pay off debt early. In most cases, bonds get called when interest rates go down. If interest rates are generally lower than the original bond rate, the issuer can call the bond, pay off the high interest debt and issue a new bond at a lower rate. This is the corporate equivalent of refinancing your house. In other cases, the issuer may simply want to reduce the amount of debt they owe to avoid paying more interest than necessary.
If you have a bond that undergoes a full call, several things will happen. First, the company will announce the call, the redemption price and the effective date. In most cases, they will redeem the bond at par. In some cases, they might pay a bit more than par. This is known as a premium. On the effective date, the bond issuer will buy back bondholder's shares at the announced price. In addition, it will pay out any interest due on the bond through the effective date. Once the call is completed, the money is yours to reinvest as you see fit.
- Standard and Poor's Dictionary of Financial Terms; Virginia B. Morris and Kenneth M. Morris; 2007
- SEC.gov; Bonds, Callable or Redeemable; April 2008
- InvestingInBonds.com; Callable Securities - an Introduction
- Fidelity.com; Corporate Bonds
- "Kiplinger"; Coping with Bond Calls; Jeffery R. Kosnett; December 2009