What it means
The most frequent use is the call option, a contract giving the holder the right, but not the obligation, to buy an asset at a fixed strike price up to a set expiry date. The buyer pays a premium up front for that right, and if the price never rises far enough the only loss is the premium.
The second meaning belongs to bond markets. A callable bond gives the issuer the right to buy its bonds back early at a stated price, which it will typically do when interest rates fall and refinancing becomes cheaper.
The third meaning appears in private equity and venture funds, where a capital call is a formal demand that investors send in part of the money they committed. Investors do not transfer the whole amount on day one; they wire it in instalments as the fund finds deals to do.
A fourth and older use is the call loan, sometimes described as money at call, meaning a short term loan repayable the moment the lender asks for it. Banks and brokers have used these arrangements for generations to manage overnight cash positions.
For a non-specialist the practical point is that a call always sits with one party and against the other. If your business has granted a call, someone else controls the timing, and they will choose the moment that suits them rather than the moment that suits you.
In practice
Real-world examples.
Example
A fund manager who expects a semiconductor firm to beat its earnings guidance buys calls with a $120 strike rather than the shares themselves. The position costs $6,000 in premium instead of the $360,000 it would take to buy 3,000 shares outright, and $6,000 is the most that can be lost.
Example
A municipal authority issued 20 year bonds at 6% with a call feature after year eight. When market rates fall to 3.8%, it exercises the call, repays the holders and issues new bonds, cutting its annual interest bill substantially.
Example
A pension fund committed $25,000,000 to a private equity fund three years ago and has so far paid in $14,000,000. It receives a capital call notice for a further $4,000,000, due in ten business days, to finance the acquisition of a facilities management business.
Formula
Calculation
Call option payoff at expiry = market price - strike price, or zero if that is negative
Profit per share = payoff - premium paid
Breakeven price = strike price + premium
An investor buys one call option contract on a listed manufacturer, covering 100 shares, with a strike price of $50.00 and a premium of $3.20 per share. The total cost is 100 x $3.20 = $320.
If the share price is $58.00 at expiry, the payoff is $58.00 - $50.00 = $8.00 per share. Profit per share is $8.00 - $3.20 = $4.80, so the contract returns 100 x $4.80 = $480 net of the premium. The breakeven price is $50.00 + $3.20 = $53.20.
If instead the share price finishes at $48.00, the option expires worthless because there is no sense in buying at $50.00 what the market sells at $48.00. The investor loses the whole $320 premium and nothing more, which is the defining feature of buying rather than writing a call.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Bramfield Instruments, an invented scientific equipment maker, met two different calls in the same quarter and learned that the word carries very different consequences depending on where it appears.
First, its finance director had bought call options on a commodity the company uses heavily, paying $84,000 in premium for the right to buy 2,000 tonnes at $600 per tonne. When the market price reached $690, the calls were worth 2,000 x ($690 - $600) = $180,000, a gain of $180,000 - $84,000 = $96,000 that offset most of the higher input cost.
Second, the company had issued $30,000,000 of callable bonds when rates were high. The bonds were called by Bramfield itself at 102, costing an extra 2% x $30,000,000 = $600,000 in call premium, but the refinancing cut the coupon from 7.5% to 5.0% and saved 2.5% x $30,000,000 = $750,000 a year. In this fictional case the premium paid for itself within ten months, which is exactly the calculation any issuer should run before exercising a call.
Watch out
Common mistakes.
- Assuming "call" always means a call option, when in bond and fund documents it usually means early redemption or a demand for committed capital.
- Buying calls because they look cheap, without noticing that the option can expire worthless and lose 100% of the premium.
- Treating a capital call as optional, when failing to fund one can trigger severe default penalties in the fund agreement.
Questions
People also ask.
Is buying a call the same risk as writing one?
No, a buyer can only lose the premium paid, while a writer who does not own the underlying asset faces losses that grow as the price rises.
Why would a company issue a callable bond at all?
Because the call gives it flexibility to refinance if rates fall, and investors accept that risk in return for a higher coupon.
How much notice does an investor get before a bond is called?
The indenture normally requires formal notice, commonly between 30 and 60 days, sent to registered holders before the redemption date.
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