call provision
Call provision
Call Provision
call provision
Bond issuers seem to call their bonds in when bond investors least want to receive their principal back—after interest rates have already dropped. If you pay close attention to a bond's call provisions, however, you can avoid experiencing losses of principal (that is, you can avoid paying big premiums for high-coupon bonds that are about to be called in at lower premium prices or, worse yet, at par). Furthermore, if you are a short maturity buyer (let's use three years for an example), you may be able to earn a higher yield for the three-year period by purchasing a longer cushion bond that is callable in three years instead of buying a bond that matures in three years. Reason: the market will generally reward you with a higher yield to the call on the cushion bond (due to the uncertainty of its actually being called in three years) compared with the yield that the market will provide you on a similar bond that will definitely mature in three years. It is important to mention that if you invest in a cushion bond and it is not called, you will be faced with the choice of either holding a longer bond than you may have intended to hold or liquidating at market value.
Stephanie G. Bigwood, CFP, ChFC, CSA, Assistant Vice President, Lombard Securities, Incorporated, Baltimore, MD