What is a Call Feature?
Call features are the sections of the terms and conditions associated with callable bonds that outline the process whereby the bond can be redeemed or retired early. A call feature is a unique component of the callable bond, which is sometimes referred to as a redeemable bond. The call feature is not a part of irredeemable bond offerings.
The call feature covers the detail of at what point in the process that the debtor can redeem a callable bond. The callable bond often has to be in effect for a specified amount of time before it is possible to call for an early redemption. As an example, a ten-year bond may not be called at any time before the bond issue is at least five years old. Specifying that the bond must reach a certain level of maturity before the debtor can call the bond ensures the investor of being able to achieve at least a minimum amount of profit from the venture.
Second, the call feature clause associated with a bond issue also often sets the amount of additional interest the holder of the bond will receive from the debtor at the time of the call. This figure is often a combination of the face value of the bond, the interest accrued up to the date of the call for redemption issued by the debtor, and any percentage above that amount offered by the debtor as compensation for the early call.
Last, the call feature will often specify the terms of payment associated with the early retirement of the bond issue. Essentially, this allows the holder of the bond to anticipate when to expect to receive payment from the debtor and thus be able to surrender the bond issue in full. This allows the holder of the bond to plan on when the funds realized from the bond issue redemption can be used for new investment opportunities.
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