Call Date
Categories: Derivatives, Accounting, Trading, Stocks, Bonds, Managed Funds
Um, no...it's not something advertised on Craigslist. A call date does not refer to a dating service, but rather the date after which someone who issued a callable bond can redeem it (pay out the proceeds).
And what is a callable bond, you might wonder...This type of bond allows the issuer to "call it in" for redemption before the maturity date.
Let's say the Los Angeles Water Authority is tired of running low on water and wants to raise funds to build new retention tanks to hold onto the rain they get. So they issue a $2,000 callable bond with a 4% coupon (interest) rate and a maturity date of January 1, 2019. However, there's a call date of November 30, 2017 with a call price of $2,070. Because this bond issue has a call date, the 4% interest is probably better than what is being offered by similar-risk bonds and maturity dates.
So let's say in the fall of 2017 interest rates in the market tank, and the Water Authority in their wisdom decide they are going to call in the 4% bonds and issue 2% bonds. They will pay their investors a premium of $70 per bond ($2070 - $2000) to help make up for missing out on the higher interest rate for two years. The Water Authority wants to refinance their higher-interest bonds for lower-interest ones in order to incur less debt.
Since investors are losing out somewhat, callable bonds are generally worth less than non-callable bonds, so their interest rates have to start out higher.
Related or Semi-related Video
Finance: What Does "Called Away" Mean?10 Views
finance a la shmoop what does called away mean? ....Okay Boeing the bomb maker was [Boeing plane dropping bombs]
trading at 127 bucks a share you thought it was getting pricey now at
25 times earnings well at $135 a share you'd sell it but here at 127 it was right on
the ledge in no-man's land unclear in your brain whether or not to [Girl thinking about stocks]
sell so you sold a covered call on it that is you sold another investor the
right to buy your Boeing shares any time in the next three months for $135 a
share that's what they pay you and that investor paid you two bucks a share for
that privilege so in essence you have a "forward sold" share of BA
at 137 not 135 right did you collect the two bucks there and you're feeling
pretty proud of yourself for coming up with this clever way to gently either [Girl feeling smug]
get out of the stock or make a free two bucks a share if the stock well never
went up that much but oh how the cold cruel street works...
A month later Santa tells the press that North Korea is being naughty and it
needs not socks or rocks but bombs dropped on it and a huge order for big [Bomb explodes]
fat noisemakers comes in to Boeing while the stock rockets overnight so to speak
From 129 to 152 a share, wow!
so what happens now well the other investor who paid two bucks a share for
the call option from you to buy your share at 135 well, they're dancing in
the street they're feeling pretty smart she paid two bucks for what is now a
gain of 152 minus 135 or $17 a share and yeah you read that right she just
made eight and a half times her money in a month good work if you can get it and
what happens to you well your shares of Boeing were called away yes took us a
while to get there to the definition thing they were called away by her thank
you very much then we're so far out of the money the other investor just called [Investor shouts and stock goes towards investor]
them right away paying you your two bucks and you just getting the hundred
and thirty-five bucks a share in cash there and that's it goodbye you lost all
the upside because your shares were called
away and meanwhile you watch the shares waft slowly upward over the next year [Boeing share value rising]
from 152 a share to 200 and you weep at the gains lost we also used the term
call away to refer to calling a bond early right like if you bought some
bonds from Boeing that gave them the right to call them before the bonds [Bond appears]
reached maturity and they do this all the time people well there's nothing you
can do those bonds will have been called away by Boeing so to be fair they do pay
you a little premium there usually for the privileged calling away yeah so not
necessarily the best thing for you but don't lose your cool and get mad because
when you sure don't want to end up on Santa's naughty list this year [Santa's reindeer fires laser at city]
we've heard Boeing's work wonders on Rudolph..