Callable Fixed Income Securities
A call option provides the issuer with the benefit of redeeming a bond prior to its maturity. Bonds are generally called when interest rates decline; therefore investors remaining in the market must reinvest in lower yields. An investor typically demands a little more yield on a callable bond over a comparable bullet, (non-callable), structure to compensate for the call risk. Investors in callable bonds must consider two yields when analyzing the return scenarios of callable bonds: the yield-to-worst (YTW; usually the call date) and the yield-to-maturity (YTM). If both yields are acceptable, then callable bonds may present a suitable investment for those seeking potentially higher returns.
Call schedules are determined at the time of issuance and vary. Calls may be one time only, on specific dates or continuous. Most bonds are callable at face value plus accrued interest. Additionally, some securities may be callable at any time based on special call provisions.
Types of Call Options
American Call. Issuer has the right to call a bond at any time starting on the first date the bond is callable until its maturity – known as “continuously callable.”
European Call. Issuer has the right to call a bond only once on a predetermined date, starting on the first date the bond is callable – known as a “one time only” call.
Bermuda Call. Issuer has the right to call a bond on a predetermined schedule (monthly, quarterly, semi-annually, annually).
Canary Call. Callable by a predetermined call schedule up to a period of time, then either called or converted to a bullet structure moving forward.
Verde Call. Callable structure with initially frequent calls (typically quarterly), followed by less frequent calls (such as semi-annually or annually).
Investors should examine each bond’s features to properly assess the risk/reward ratio. Utilized carefully, callable bonds may potentially help increase the total return of a well-diversified portfolio. For more information about callable securities, visit the Financial Industry Regulatory Authority at finra.org, U.S. Securities and Exchange Commission at sec.gov and SIFMA's investinginbonds.com.
Investing involves risk and you may incur a profit or a loss. The value of fixed income securities fluctuates and investors may receive more or less than their original investments if sold prior to maturity. Bonds are subject to price change and availability. Investments in debt securities involve a variety of risks, including credit risk, interest rate risk, and liquidity risk. Investments in debt securities rated below investment grade (commonly referred to as "junk bonds") may be subject to greater levels of credit and liquidity risk than investments in investment grade securities. Investors who own fixed income securities should be aware of the relationship between interest rates and the price of those securities. As a general rule, the price of a bond moves inversely to changes in interest rates. Diversification does not ensure a profit or protect against a loss.
Trading ideas expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Investors are urged to obtain and review the relevant documents in their entirety. RJA is providing this communication on the condition that it will not form the primary basis for any investment decision you may make. Furthermore, because these are only trade ideas, investors should assume that RJA will not produce any follow-up. Employees of RJA or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. RJA and/or its employees involved in the preparation or the issuance of this communication may have positions in the securities discussed herein. Securities identified herein are subject to availability and changes in price. All prices and/or yields are indications for informational purposes only. Additional information is available upon request.
The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
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