Legal Definitions - call price

The call price is a predetermined price at which an issuer (such as a company or a government entity) can repurchase its own bonds or preferred stock from investors before the scheduled maturity date. This feature, known as a "call provision," allows the issuer to retire the securities early, often to take advantage of lower interest rates in the market or to reduce dividend payments. For investors, if a security is "called," they receive the call price (which usually includes a premium above the face value) and any accrued interest, but their investment is returned early, meaning they lose out on future interest or dividend payments from that specific security.

• Example 1: Corporate Bond Refinancing

  A technology company, InnovateTech Inc., issued $100 million in corporate bonds five years ago with a 6% annual interest rate. The terms of these bonds included a call provision stating that the company could repurchase them after five years at a call price of $1,030 per $1,000 bond. Now, market interest rates have significantly dropped to 3%. InnovateTech decides to exercise its call option.

  This illustrates the call price because InnovateTech will pay each bondholder $1,030 for every $1,000 bond they hold, plus any accrued interest. By doing so, the company can then issue new bonds at the current lower 3% interest rate, saving a substantial amount on future interest payments. The investors receive their principal back along with a $30 premium per bond, but their investment in InnovateTech's 6% bonds ends prematurely.

• Example 2: Municipal Bond for Public Works

  The City of Harmony issued municipal bonds seven years ago to fund the construction of a new public library, offering a 4% tax-exempt interest rate to investors. The bond agreement stipulated that the city could call these bonds after seven years at a call price of 102% of their face value. Due to an improved credit rating for the city and a general decline in interest rates for municipal bonds, the city council decides to call the bonds.

  This illustrates the call price because the City of Harmony will repurchase the bonds from investors at 102% of their original face value. For a $5,000 bond, the call price would be $5,100. This action allows the city to issue new bonds at a lower interest rate, thereby reducing its debt service costs and saving taxpayer money over the long term. Investors receive their principal and a premium, but their stream of tax-exempt income from these specific bonds concludes.