What does a call provision allow the issuer to do, and why would they do it?

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  1. What does a call provision allow the issuer to do, and why would they do it?

 

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A call provision on a bond issue allows the issuer to pay off the bond debt early at a cost of the principal plus any call premium. Most of the time a bond issuer is called, it is because interest rates have substantially declined in the economy.  The issuer calls the existing bonds and issues new bonds at the lower interest rate.  This reduces the interest payments the issuer must pay each year.

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