A “CALL” has distinct meanings in banking, bonds, and options. Each interpretation carries its specifics and implications, ranging from the demand for immediate repayment of a loan to the right to buy shares or redeem bonds before their maturity.
CALL in Banking
In banking, a “CALL” refers to the demand for immediate repayment of a secured loan. When a banker calls a loan, the entire principal amount is due immediately, regardless of the initial loan term. This is often used under circumstances where the borrower’s creditworthiness is in question or when specific conditions outlined in the loan agreement are not met.
Example of CALL in Banking
Consider a business that takes out a secured loan payable over five years. If the financial standing of the business deteriorates significantly, the bank may issue a call on the loan, requiring the business to repay the remaining principal immediately.
CALL in Bonds
In the context of bonds, a “CALL” refers to the issuer’s right to redeem outstanding bonds before their scheduled maturity date. This provision is detailed in the bond’s prospectus and specifies the earliest dates when the bonds may be called (call dates).
Example of CALL in Bonds
If interest rates decrease significantly, an issuer may decide to call its high-interest bonds and reissue new bonds at lower rates to save on interest expenses.
Special Considerations in Bond CALL
- Call Feature: This specifies if and when a bond can be called before maturity.
- Call Price: This indicates the price at which the bond will be repurchased, often at a premium over the par value.
- Indenture: The formal agreement between the bond issuer and the bondholders, detailing the call provisions.
CALL in Options
In the derivatives market, a “CALL” (or call option) gives the holder the right, but not the obligation, to buy a specific number of shares at a predetermined price (strike price) within a fixed period.
Example of CALL Option
An investor purchases a call option for 100 shares of Company XYZ at a strike price of $50, expiring in three months. If the stock price rises to $70, the investor can exercise the option to buy the shares at $50, potentially selling them at the higher market price.
Related Terms
- Callable: Refers to bonds that can be redeemed before maturity.
- Call Feature: The clause that permits the issuer to redeem the bon before maturity.
- Call Price: The price that must be paid when calling the bond.
- Call Option: An agreement that gives the option holder the right to buy an asset at a predetermined price.
- Put Option: An agreement that gives the option holder the right to sell an asset at a predetermined price.
FAQs
What happens when a loan is called in banking?
Why would a bond issuer call a bond?
Can a holder of a call option be forced to buy the shares?
Summary
The term “CALL” encompasses different actions depending on the context within banking, bonds, and options. It involves immediate loan repayment in banking, the ability to redeem bonds early in the bond market, and the right to buy shares at a specified price within a specific timeframe in options trading. Understanding each context helps investors and borrowers make informed financial decisions.
References
- Investopedia. (n.d.). Call Option. https://www.investopedia.com/terms/c/calloption.asp
- The Balance. (n.d.). Callable Bonds: What They Are and How They Work. https://www.thebalance.com/what-is-a-callable-bond-5199511
- Federal Reserve Bank of St. Louis. (n.d.). Understanding the Call Provisions in Bonds. https://www.stlouisfed.org/
This format should provide comprehensive coverage of the term “CALL” and serve as a useful addition to our encyclopedia.
