Call bonds are also termed bonds with call provisions. Call bonds are plain vanilla bonds that have a call provision attached, i.e. the issuer has the option to repurchase the bond after a stipulated period but before maturity, under certain conditions (usually price). Clearly, the issuer has the right but not the obligation to exercise this “option”.
Usually in the case of call bonds a pre-determined cost to the issuer (advantage to the buyer) is included in the deal. For example, a 10% pa coupon callable bond issued at a price of 100% may be callable at a price of 110%, i.e. if the issuer calls the bond, the holder will be paid a price of 110%. Clearly, the issuer will only call the bond if the price rises to above 110%.
In the case of call bonds where the price is determined according to a tender, the bonds are called at par. This option for the issuer will ensure that the tender price will be lower than on equivalent term bonds that are not subject to calls.
There are three versions of call bonds:
- Where the issuer has the option to call the entire issue.
- Where the issuer has the option to call the issue in tranches.
- Where the issuer has the option to call part of the issue.