Definition:

The call price is the predetermined price at which the issuer of a callable bond or preferred stock can redeem the security early. It’s typically set at a premium to the face value of the security, meaning the issuer must pay more than the face value to call the security.

Key points about call price:

  • Callable securities: Call prices are associated with callable bonds or preferred stock.
  • Early redemption: The issuer has the right to call the security early at the call price.
  • Premium: The call price is typically at a premium to the face value of the security.
  • Investor protection: Call premiums are intended to compensate investors for the potential loss of future income if the security is called early.

Why are call prices used?

  • Incentive: Call premiums can incentivize investors to hold the security to maturity, as they may not want to forego the potential for additional returns.
  • Market conditions: Issuers may use call premiums to make callable securities more attractive to investors, especially in low-interest rate environments.

In essence, the call price is the price at which the issuer of a callable bond or preferred stock can redeem the security early, and it’s intended to compensate investors for the potential loss of future income if the security is called.