Call Price

To figure out when a call price comes into play, we should first understand what a callable bond is. Think of it as a type of bond where the issuer can "call it in" before it reaches the official maturity date. This usually happens when the issuer wants to protect itself on the off chance that interest rates will decline and they will be stuck paying out a higher rate of interest than necessary. In order to entice customers to buy a callable bond, they usually start out with a higher interest rate than other similar (but non-callable) bonds are paying.

The bonds will also state what the call dates will be and what they will pay as a call price if they do call in the bonds early. The call price will be higher than the original price of the bond as the issuer wants to try and make up for its customers losing out on the higher interest rate payments if the bond had gone to maturity.

Let's say the Ohio State University wants to build more fitness centers for students in order to keep up with what private universities are offering. So, they decide to raise the funds by issuing a $3,000 callable bond with a 5% coupon (interest) rate and a maturity date of January 1, 2020. However, there's a call date of October 31, 2017 with a call price of $3,080. Because this bond issue has a call date, the 5% interest is probably better than what is being offered by similar-risk bonds and maturity dates.

Suppose that in the fall of 2017 interest rates in the market tank, so the University wisely decides to call in the 5% bonds and issue 3% bonds. They will pay their investors a premium of $80 as a call price per bond ($3,080 - $3,000) to help make up for missing out on the higher interest rate for three years. The University wants to refinance their higher interest bonds for lower interest ones in order to incur less debt. Also, when interest rates go down, the price of a bond goes up, so the university can issue new bonds at a lower interest rate and get a higher price.