Bond Call Price
What Does Bond Call Price Mean?
A bond call price is an option built into the bond, allowing the issuer to redeem bonds should they reach a certain price.
![bcp 1](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-1.jpg)
How it Works
When a corporation issues a bond, it issues the bond around current interest rates.
![bcp 2](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-2.jpg)
This means it will pay the current rate of interest each year—over the bond term.
![bcp 3](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-3.jpg)
However, interest rates may fall in the next year or so.
![bcp 4](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-4.jpg)
This means the issuer can now access lower interest rates.
![bcp 5](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-5.jpg)
However, the issuer will be left paying the higher interest rate.
![bcp 6](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-6.jpg)
At this point, the issuer could buy back their bond.
![bcp 7](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-7.jpg)
Then re-issue the bond.
![bcp 8](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-8.jpg)
This way, they could take advantage of the lower interest rate.
![bcp 9](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-9.jpg)
Problem is, the new price will be higher than the issue price.
![bcp 10](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-10.jpg)
As a result, the issuer will lose money on the deal.
![bcp 11](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-11.jpg)
This means that any benefit gained from lower interest rates will be offset by the loss on the buy back.
![bcp 12](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-12.jpg)
To take advantage of potential falls in interest rates, the issuer can buy a bond call option ahead of time.
![bcp 13](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-13.jpg)
The issuer will need to pay a premium for this option.
![bcp 14](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-14.jpg)
However, the call option will lock in a buy-back price.
![bcp 15](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-15.jpg)
Then, if interest rates fall, the bond price will rise.
![bcp 16](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-16.jpg)
Now, the bond issuer can exercise the call option at the option’s strike price.
![bcp 17](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-17.jpg)
This means the issuer won’t lose money on the buy-back.
![bcp 18](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-18.jpg)
After this, they can re-issue the bond, at a higher price.
![bcp 19](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-19.jpg)
At the same time, they can take advantage of lower interest rates.
![bcp 20](https://seeaccountingnow.online/wp-content/uploads/2021/08/bcp-20.jpg)