What Is a Call Privilege?

Malcolm Tatum

A call privilege is a provision that is often included in the structure of a bond indenture. Essentially, a call privilege stipulation allows the entity that issues the bond to call or redeem the bond prior to the stated maturity date. The terms of the bond contract will normally allow this privilege to be invoked at specific times during the life of the bond, or when certain events connected with the bond issue or the issuing entity should take place. Inclusion of this type of provision within a bond contract is very common with a number of bonds, and is designed to not only provide additional options for the issuer but to also protect the interests of the investor.

Man climbing a rope
Man climbing a rope

As part of the call privilege, trading regulations in many nations require that the bond contract structure this particular provision so that investors know exactly when and under what circumstances the bond can be called early. This will often mean identifying specific call dates during the life of the bond. Along with including the dates, the provisions must also give investors information on the prices that are associated with each of those potential call dates. If there are provisions for specific events that must occur in order to invoke one of these dates, those must also be clear in the text of the bond contract.

Requiring clear, concise information about the call privilege is very important for investors. The data can be used to calculate the amount of return that can reasonably be anticipated at each of the successive call dates. Using that information, investors can determine if buying the bond issue would yield an equitable return, even if it is called and settled before the original maturity date. If so, then the investor can make the purchase and enjoy increasing levels of return as more of the call dates pass without the invoking of the call privilege, possibly even earning the full benefits if the bond survives all the way to maturity.

Since bonds are relatively stable investments in comparison to more volatile investment options, the presence of the call privilege in the bond terms and conditions is not likely to cause any great distress to investors. The only potential issue is if investors do not take the time to read through those provisions and make assumptions that the bond cannot be called early. Generally, even if the issuer invokes the call privilege, the investor will recoup the full amount of the original investment, plus earn a little more in the bargain.

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