Definition
Call is a term that holds different connotations in the realms of banking, bonds, and options:
Banking
In banking, a call refers to the demand to repay a secured loan. When a banker calls a loan, it means the entire principal amount of the loan is due immediately.
Bonds
In the context of bonds, a call indicates the issuer’s right to redeem outstanding bonds before their scheduled maturity. The prospectus of every bond issue with a call provision in its indenture specifies the first dates when an issuer may call the bonds.
Options
In options trading, a call represents the right to buy a specific number of shares at a specified price by a predetermined date.
Examples
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Banking Example:
- A bank issues a secured loan to a business with a clause that allows it to call the loan if the business fails to meet certain financial criteria. If the business defaults, the bank can call the loan and demand immediate repayment of the outstanding balance.
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Bonds Example:
- An issuer releases corporate bonds and includes a call provision in the indenture, allowing them to redeem the bonds after five years instead of their ten-year maturity if interest rates decrease significantly.
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Options Example:
- An investor purchases a call option for Company XYZ’s stock at a strike price of $50 per share. The option grants the investor the right to buy 100 shares at $50 per share anytime before the option expires.
Frequently Asked Questions (FAQs)
What does it mean when a banker calls a loan?
It means the lender demands immediate repayment of the entire principal amount of a secured loan.
Can all bonds be called at any time by the issuer?
No, only bonds with specific call provisions can be called, and the dates and conditions under which they can be called are detailed in the bond’s indenture.
Why might an issuer choose to call a bond?
An issuer might call a bond to refinance the debt if interest rates have declined since the bond was issued, allowing the issuer to replace the bonds with new ones at a lower interest rate.
What is the purpose of a call option in options trading?
A call option allows the holder to buy a specified number of shares at a predetermined price, providing an opportunity to profit if the share price goes above the strike price before the option expires.
Are there risks associated with call provisions in bonds?
Yes, if an issuer calls a bond early, investors might have to reinvest the proceeds at a lower interest rate than the called bond, which is often referred to as reinvestment risk.
Related Terms
- Call Provision: A clause in a bond indenture that allows the issuer to redeem the bond before maturity.
- Callable: Bonds or securities that can be redeemed by the issuer before the scheduled maturity date.
- Call Feature: Specific conditions under which an issuer can exercise the call provision.
- Call Price: The price at which a callable bond can be redeemed by the issuer.
- Call Option: A financial contract giving the buyer the right, but not the obligation, to buy an asset at a specified price within a certain period.
- Put Option: A financial contract giving the buyer the right, but not the obligation, to sell an asset at a specified price within a certain period.
Online References
Suggested Books for Further Studies
- “Options as a Strategic Investment” by Lawrence G. McMillan
- “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman
- “The Banking System: International Trends and Innovations” by Alice Vila
Fundamentals of Call: Finance Basics Quiz
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