Call Price

Study guide: Exam FM-2

The call price is the price at which an issuer may redeem a Callable Bond before maturity on a specified call date. The call price is typically set at or above Face Value to compensate the bondholder for the loss of future coupon income.

• The difference between the call price and the face value is the Call Premium:

\text{Call Premium} = \text{Call Price} - \text{Face Value}

• In bond pricing problems, the call price replaces the Redemption Value C in the bond formula when the issuer is assumed to call the bond:

P_{\text{call}} = Fr \cdot a_{\overline{n_c}|j} + C_{\text{call}} \cdot v^{n_c}

• Where n_c is the number of periods until the call date.

Bond Priced to a Call A 1{,}000 face bond with 8% annual coupons can be called in 3 years at 1{,}050. Find the price to yield 6%.

Answer P = 80 \cdot a_{\overline{3}|6\%} + 1050(1.06)^{-3} = 80(2.6730) + 1050(0.839619) = 213.84 + 881.60 = 1095.44