Benefits and Costs of a Call Provision

It is very important for a company which intends to think about a long term bond issue to include a call provision within there system of organization. Before we can discuss the benefits surrounding the call provision it is very important that we try and understand what a bond is; a bond is a certificate which promises to pay back not later than a specified date a certain amount of money which this concerned investor or bondholder has loaned to the company. Westerfield (2008) asserts that it is important when a company want to consider long term bonds it should broadly consider the eventual alert of a possible call.  

There are several benefits and cost that accompanies a call provision especially to that company seeking for a long term bond issue. There are various benefit associated to call provision but the two main benefits are those of; the company taking advantage of the declines in interest rates through calling in an issue and later replacing it with a low token issue and the second benefit is that of doing away with a covenant due to the same reasons. According to Westerfield (2008), a call provision is termed as significant if it is desirable within the investor point of view so that he may realize how it does reduces coupon rate on the bond of the company. On the issue about cost, the cost associated to provision call is that it is important that it does back the bond at a certain unappealing price.

Other than benefit the discussed above, call provision come along with several effects for instance, it creates uncertainty in the continuation of higher yield right after the call date. It also creates a wider risk whereby the purchase price tends to be higher as compared to the redemption price therefore it is more likely that the company loses on investment. Lastly, call provision also has a negative effect in that it may inhibit the appreciation of bonds (Brigham, 2009).