What it means
Call dates are set out in the bond's legal documents when it is issued. A typical structure gives the issuer no right to call for the first few years, then permits redemption on any interest payment date after that, or sometimes on specific annual dates only.
The reason issuers want call dates is refinancing. If a company borrowed at 7% and market rates have since fallen to 4%, calling the old bonds and issuing new ones cuts its interest bill for the remaining life of the debt.
For an investor the effect is uncomfortable. Calls happen precisely when rates have fallen, which is exactly when reinvesting the returned cash at a similar yield is hardest, so the money comes back at the worst possible moment.
This is why analysts look at yield to call rather than only yield to maturity. Yield to call assumes the bond is redeemed on a given call date at the price set for that date, and the lower of the two figures is often described as the yield to worst.
There are variations worth knowing. Make whole calls let the issuer redeem at any time but require it to compensate investors with a price based on the present value of the remaining payments, and par calls allow redemption at face value in the final few months before maturity.
In practice
Real-world examples.
Example
A utility issues 30 year bonds with the first call date ten years after issue. When rates drop sharply in year eleven, the treasury team exercises the call on the next scheduled date, repays holders at 101 and refinances at a coupon nearly two percentage points lower.
Example
A wealth manager builds a bond ladder for a retired client and finds that four of the twelve holdings have call dates inside the next two years. She reprices the whole portfolio on a yield to worst basis and discovers the expected income is roughly 0.4 percentage points lower than the headline figures suggested.
Example
A property developer issues preferred shares that become callable after five years, with the dividend rate stepping up sharply if they are not redeemed. Investors treat the first call date as the effective maturity, because the step up makes leaving the shares outstanding expensive for the company.
Formula
Calculation
Approximate yield to call = (annual coupon + (call price - current price) / years to call) / ((call price + current price) / 2)
Consider a bond with a $1,000 face value paying a 6% coupon, so $60 a year. It currently trades at $1,040, and the next call date is in three years at a call price of $1,030.
The numerator is $60 + ($1,030 - $1,040) / 3 = $60 - $3.3333 = $56.6667. The investor collects $60 a year but expects to give back $10 of the purchase price over three years.
The denominator is ($1,030 + $1,040) / 2 = $1,035, the average of the call price and today's price. The approximate yield to call is $56.6667 / $1,035 = 5.48%, noticeably below the 5.77% current yield of $60 / $1,040, which is why the call date changes the picture.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Harrowgate Endowment, an invented charitable fund, held $2,000,000 of bonds bought at 104 with a 6.5% coupon. The investment committee had budgeted $130,000 of annual income for a decade and treated it as settled.
What the committee had skimmed over was that the bonds carried a call date two years away at a price of 102. When market rates fell, the fictional issuer called them, and Harrowgate received 2,000 bonds x $1,020 = $2,040,000 rather than the $2,080,000 it had paid, a capital loss of $40,000 on top of losing the coupon.
Reinvesting at the prevailing 4.1% produced roughly $2,040,000 x 4.1% = $83,640 a year, some $46,360 less than budgeted. The illustrative point is not that callable bonds are bad, but that the committee should have modelled income to the call date, not to maturity, before committing the endowment's spending plans.
Watch out
Common mistakes.
- Assuming a bond will be held to maturity when the documents allow redemption years earlier.
- Paying a large premium above face value for a bond that can be called at par shortly afterwards, guaranteeing a capital loss.
- Quoting yield to maturity in client reports for callable bonds instead of the more conservative yield to worst.
Questions
People also ask.
Does an issuer have to call a bond on the call date?
No, the call is a right and not an obligation, and issuers normally exercise it only when refinancing at a lower rate makes it worthwhile.
What is the difference between a call date and a maturity date?
The call date is an optional early redemption opportunity for the issuer, while the maturity date is the fixed date on which repayment is compulsory.
How do I find a bond's call dates?
They are listed in the indenture or offering document as a call schedule, and most market data services show them alongside the corresponding call prices.
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