Call Risk

Posted in Finance, Accounting and Economics Terms, Total Reads: 332

Definition: Call Risk

In case of a callable bond Issuer can redeem the bond prior to maturity. So there is a risk faced by the bond holder. This risk is called Call Risk.

In case of a callable bond issuer has the right to buy back the bond prior to maturity. Typically this may happen when issuer is expecting market rates to decline in future and then issuer will be paying a higher rate than market. In such cases Bond will buy back the bond and bond holder will be reinvesting a lower interest rate.

For example: Consider a callable 10 year, 8% coupon bond issued by company ABC. At the time of issue 8% was the prevailing market rate. After 3 years the Market rate fell to 5%. Now the Company is paying more than the market rate. So the company will redeem the bond and again issue new bonds at 5%.



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