First Call Date

  

Categories: Trading, Regulations

The first date on which we can redeem a callable bond, even if it hasn’t reached its maturity date.

When we buy bonds, we do so knowing that they will mature on a certain date in the future. But sometimes, if we sense a changing in economic tides, we can cash in that bond before it’s mature. (This isn’t always an option; check yo’ bonds to be sure.)

Whatever is going on in our bond world, “first call” refers to the first actual date on which we can call in that bond.

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Finance: What is call protection, and ho...2 Views

00:00

And finance Allah shmoop what is called protection and how

00:05

does it work So you wish this term was about

00:09

preventing those annoying telemarketers who call you right in the

00:12

middle of dinner hoping to sell you X and satellite

00:14

subscriptions But it's not Call protection has to do with

00:17

a bond being called early meaning that the company that

00:21

issued the bond I either company that borrowed the money

00:23

is paying at least full par value principle if not

00:26

a percent or two premium above that figure when they

00:30

call the bond So why would you want protection against

00:33

this happening Like isn't it a good thing that bonds

00:36

get called back by the people who borrow the money

00:38

and then get fully paid off Well the answer No

00:41

not always Let's say a bond is issued in a

00:44

high interest rate environment like the Fed is trying to

00:47

cool inflation so they have short term high interest rates

00:50

or high short term borrowing costs That calm six percent

00:53

for one year paper eight percent for five year paper

00:56

for the best borrowers and a bond you invested in

00:58

was yielding two hundred basis points above those U S

01:01

government bonds or in this case and say it's five

01:03

year paper That's a yielding ten percent But then inflation

01:07

cooled and the Fed suddenly lowered rates a lot and

01:10

that six percent paper a few years later pays only

01:13

four percent and that five year eight percent paper is

01:17

now down Teo five percent Well the company that issued

01:20

its bond paying ten percent interest could refinance that bond

01:24

today at only seven percent interest And they do Right

01:28

so they're saving three points of interest Unusually you know

01:30

like a billion dollars of Borrow They call the bonds

01:34

back home to the mother ship Yep they paid them

01:36

all off Maybe with say a two percent premium Big

01:39

Woop so that a thousand dollars par unit of the

01:41

bond gets one o two or a thousand twenty to

01:43

pay it off and retire it well thank you The

01:46

investor in that bond who thought you were getting ten

01:49

percent a year in interest for a while You can't

01:51

even find paper like that in the market The best

01:54

you can do of similar risk in duration is only

01:57

seven percent so you've lost three percent per year compounded

02:01

interest by having those lovely ten percent yielding Bonds called

02:05

its protection against this lost yield that bond holders want

02:10

and well that's how it works If you'd had bonds

02:13

that were uncool a ble or call pretty detected the

02:16

company couldn't just buy them back and refinance with cheaper

02:19

paper So yeah that's why it's always nice to have

02:21

your bonds protected and for even greater security we recommend 00:02:25.28 --> [endTime] investing in a Rottweiler

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