The president's phone rings. It's the Joint Chiefs. (Now legal in 11 states.) A large alien spacecraft has appeared over Washington, and radiation emanating from the ship suggests the warming up of a death rate. One kind of doomsday call.
Another has to do with the bond market.
"Call" in this case has to do with calling in a debt. When a bond is issued, it has a maturity date. You buy a $1,000 bond from Canadian MapleWorks at 10% interest, maturing in 10 years. So you'll get $100 a year (that's the 10% interest) every year for each of the next 10 years.
The doomsday call allows the bond issuer to call the bond in early. So, under certain conditions, Canadian MapleWorks could decide to pay out a fixed amount to buy back all its bonds (or, to put it another way, to call them in).
It's doomsday for the bond holder, because now they don't get their full 10 years of interest. They have to settle for whatever the pre-arranged amount is (set out as part of the stipulations when the bond was issued).
The purpose for the call is to provide a safety valve in case interest rates drop. If rates fall and Canadian MapleWorks can now issue bonds at 7% interest instead of 10% interest, they'd be better off exercising the doomsday call on the 10% bonds and then replacing them with 7% versions. Ultimately, they'd pay out less to borrow the money.
The whole doomsday call thing is popular in Canada, maybe because life in the great wide North is more precarious, with the potential for frostbite in April and beaver attacks year 'round. Whatever the case, a lot of Canadian corporate bonds include a doomsday call, to the extent that they are sometimes known as "Canada calls."
Related or Semi-related Video
Finance: What is Busted Convertible?14 Views
Finance a la shmoop..what is a busted convertible?
well techno growth forever biotechs swore to its customers that upon death they [Mans head enters into a glass jar]
could sever their heads freeze them and in 40 years they would have technology
to have them reborn into a really cool robot body and yeah kim kardashian model
was a huge huge hit we cannot lie.... The company stocks zoomed to a hundred
dollars a share and management needed cash to open offices in China Latin [Cash travels around the world]
America and Africa but they didn't want to suffer dilution by just selling
equity or part ownership in themselves to the street at least not at the
hundred dollar share price they really just wanted to borrow money [Cash and an IOU note appears on a table]
to fund these new offices because well they thought their stock would easily
get to $250 a share in the next few years
tons of people out there who wanted to you know live forever
you know like fame.....nevermind their bankers were nervous about how
investors would react to just a straight bond which carried 8% interest so
instead they kind of compromised by doing a convertible preferred stock [Men give handshake]
offering they sold preferred stock to the street that carried just 3% interest
but those preferred shares were convertible into common stock at a
hundred seventy five bucks a share so the owners of the preferred would keep [Stock value of biotech company rises]
clipping their three percent coupons until one day the stock hit a hundred
seventy five bucks or better well and then they could participate in the
[Man hits a baseball] upside if the stock really was a homerun but sadly as many things do in shmoop
video....Test came back from the early decapitating trials and well they were
oh so not good legions of zombies began to roam the streets and while consumers [Zombies walking along the streets]
just didn't want to go there they'd rather truly rest in peace so the stock
cratered down to $20 a share where it would sit for all eternity in what is
called a busted convertible and took us a while to get there but we got
there the convertible preferred would pay 3% a year in interest as it always [Preferred stock with 3% interest sticker]
had and a convertible stock is so far below the conversion price of $175 well,
investors assume it will never convert the investment case views
the convert solely as a preferred or kind of like a bond offering against
competitive bond interest rates so yeah that's a busted convertible although so
is this they really never should have given robot Kim K a driver's license [Robot Kim Kardashian beside an upside down, crashed car]
Up Next
A derivative of a security is a "something" which derives its value based on the performance of that security... either a put option or a call option.