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Finance Glossary

Just call us Bond. Amortized bond.

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Call Risk

Definition:

Your phone might ring in the middle of the night. If it does, the fear in a call risk is that a bonds or preferred stock will be called due to a big move in interest rates. The price of the bonds is inversely correlated to the interest rate environment and their coupons. That is, if your bonds have a coupon of 8% and prevailing rates fall, the price of that bond should go up - yield hungry investors will bid up the 8% payment streams. But if rates go up a lot then the bond price should fall and if it hits a threshold (many hedge funds for example, buy bonds levered with lots of margin/ borrowings to do so), the bonds could be called either by the company or by the brokerage, who will no longer allow huge margin draws to the client.

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