call risk

Call Risk

The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem the issue prior to its maturity. This means the bondholder will receive payment on the value of the bond and, in most cases, will be reinvesting in a less favorable environment (one with a lower interest rate).

Notes:

Typically, bond issuers will call a bond because of the high rate they are paying on the bond. If interest rates have declined since the issuer first issued the bonds, issuers will often call the bond once it becomes callable and will create a new issue at a lower rate. The bondholders will then lose out on the high rate of their bond and will have to invest in a lower rate environment.

See also: Bond, Callable Bond, Coupon, Interest Rate, Issuer, New Issue, Reinvestment Risk

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Call risk

The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.

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call risk

See prepayment risk.