What is ‘Call Risk’
The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem the issue prior to maturity. This means the bondholder will receive payment on the value of the bond and, in most cases, will be reinvesting in a less favorable environment (one with a lower interest rate).
Explaining ‘Call Risk’
Typically, bond issuers will call a bond because of the high rate they are paying on the bond. If interest rates have declined since it first issued the bonds, issuers will often call the bond once it becomes callable and will create a new issue at a lower rate. The bondholders will then lose out on the high rate of their bond and will have to invest in a lower rate environment.
Further Reading
- The effects of default and call risk on bond duration – www.sciencedirect.com [PDF]
- High-yield bond default and call risks – www.mitpressjournals.org [PDF]
- Fair value of liabilities: the financial economics perspective – www.tandfonline.com [PDF]
- Put-call parity and market efficiency – www.jstor.org [PDF]
- Determinants of the call option on corporate bonds – www.sciencedirect.com [PDF]
- Call options and the risk of underlying securities – www.sciencedirect.com [PDF]
- Arbitrage-free approximation of call price surfaces and input data risk – www.tandfonline.com [PDF]
- Credit risk and liquidation cost: Effects on prices of convertible bonds, as well as conversion and call strategies. – elibrary.ru [PDF]
- Big data, computational science, economics, finance, marketing, management, and psychology: connections – www.mdpi.com [PDF]
- Living in the world risk society: A Hobhouse Memorial Public Lecture given on Wednesday 15 February 2006 at the London School of Economics – www.tandfonline.com [PDF]
