Callable Security

Posted in Finance, Accounting and Economics Terms, Total Reads: 97
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Definition: Callable Security

A callable security is the security which comes with a call provision. A call provision is a privilege given to the issuer to redeem or repurchase the securities at a specified rate before the date of maturity. These securities are generally cheaper than the other securities in the market because of the risk of call provision attached to it.

The conditions for exercising the call provisions are specified before the securities are issued.

The amount paid at the time of repurchase or redemption is known as call price and the difference between the call price and the par value (book value) is known as the call premium.

 

Example: -

The issuer issues bonds with call provision at a coupon rate of 8% with 25 years of maturity. But after one year the coupon rate of the similar bonds falls to 5%.The issuer will now exercise his call provision and buy back 8% coupon bonds and issue them again with 5% coupon rate and avoid giving higher rate of interest.

 

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