call risk

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Call risk

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

Call Risk

A risk that a callable bond will be repaid early and that the money earned may not be able to be reinvested in a security with a comparable return. Suppose one invests in a callable bond with coupon payments of 4%. However, interest rates fall and the issuer calls the bond and pays the par value. The investor may make a profit, but now he/she may only purchase a bond with a coupon of 2.5%. Most callable bonds include call periods in the indenture, protecting the bondholder from this risk for a certain period of time. Call risk is one of the most common kinds of reinvestment risk.

call risk

References in periodicals archive ?
Van De Gucht, 1999, "High-Yield Bond Default and Call Risks", Review of Economics and Statistics, 81:409-419