Call Price

Call price is the amount a corporation must pay to redeem its outstanding callable preferred stock or callable bonds early, buying the securities back from whoever currently holds them before their stated maturity or redemption date would otherwise require it. The specific call price, and the earliest date the call right becomes available, are both fixed in advance, in the bond indenture or the terms of the preferred stock, at the time the security is first issued.

The call price is usually set equal to the security's face or par value plus a call premium, which compensates holders for the inconvenience and reinvestment risk of having their investment redeemed earlier than they may have expected. This premium commonly declines over time under a schedule built into the original terms, often shrinking to zero by the time the security approaches a specified later date, after which the issuer can call it at exactly par value with no premium owed at all.

A company issuing a callable bond or preferred stock typically wants the flexibility to refinance at a lower rate if interest rates fall after issuance, something it cannot do with a non-callable security without either waiting for maturity or negotiating a separate buyback. In exchange for this flexibility, the issuer generally has to offer investors either a higher coupon or dividend rate, or a lower issue price, than an otherwise identical non-callable security would require, since callability is a real cost imposed on the investor's side of the bargain.

A callable security's market price is effectively capped near its call price once interest rates fall low enough that a call becomes likely, since few investors will pay significantly more for a bond than the amount they know the issuer can redeem it for on short notice. This dynamic, sometimes described as negative convexity, is one of the more distinctive features that separates the valuation of callable bonds and preferred stock from otherwise similar non-callable securities.

For the issuer, understanding its own call rights and the schedule of call prices available to it is central to refinancing strategy; for the investor, understanding the issuer's call price and the likelihood it will actually be exercised is central to correctly estimating a callable security's realistic expected return and holding period, rather than simply assuming it will run to its stated final maturity.

A bond indenture might set the call price at 103% of face value for the first callable year, 101.5% the following year, and exactly 100% from the third callable year onward. An issuer calling $10 million face value of these bonds in year one would pay $10.3 million total, while waiting until year three would cost exactly $10 million, illustrating why issuers often time a call to coincide with the point the premium has shrunk to the smallest amount still worth paying.