Call Schedule

A call schedule is the specific timetable laid out in a bond's contract that details when the issuer (the borrower) can buy back the bond before its official maturity date. This feature, known as a call provision, is a big win for the issuer but can be a nasty surprise for an unprepared investor. The schedule explicitly lists the call dates—the earliest dates the bond can be redeemed—and the corresponding call price the issuer must pay. This price is typically set at a slight premium over the bond's par value (its face value), and this extra amount, the call premium, usually declines as the bond gets closer to maturity. Think of it as the issuer's pre-arranged escape plan; if they can find a cheaper way to borrow money later, the call schedule tells them exactly when and for how much they can ditch their old, more expensive debt.

The beauty of a call schedule is its simplicity. It's a straightforward list of dates and prices. Understanding this table is crucial to understanding the true nature of your investment in a callable security.

Imagine you buy a 10-year corporate bond with a face value of $1,000 and a juicy 6% coupon rate. The bond's documentation, or prospectus, states it is “callable after year 5.” The call schedule might look something like this:

• Beginning Year 5: Callable at $1,030 (103% of par value)
• Beginning Year 6: Callable at $1,020 (102% of par value)
• Beginning Year 7: Callable at $1,010 (101% of par value)
• Year 8 and beyond: Callable at $1,000 (100% of par value)

This means that five years after the bond was issued, the company has the option, but not the obligation, to buy back your bond from you for $1,030. A year later, that price drops to $1,020, and so on. The declining call premium is designed to compensate early investors more generously for having their investment cut short.

For a value investor, who prizes certainty and predictable returns, a call schedule is a flashing warning sign that must be analyzed carefully. Issuers don't call bonds for fun; they do it for one simple reason: interest rates have fallen.

When prevailing interest rates drop below your bond's coupon rate, the issuer is highly motivated to call the bond. Why would they keep paying you 6% when they can issue new debt at 4%? This creates two major problems for you:

• Capped Upside: The market price of your bond will rarely rise much higher than its next call price. Why would anyone pay $1,050 for a bond they know could be snatched away from them for $1,030 in a few months? The call provision effectively puts a ceiling on your potential capital gains.
• Reinvestment Risk: The bigger problem. The issuer calls your bond, hands you your cash back, and wishes you well. Now you're stuck with a pile of money that you must reinvest in a market with much lower interest rates. Your high-yield stream of income is gone, replaced by a much less attractive one.

A bond's advertised yield to maturity (YTM) assumes you will hold it until its final maturity date. With a callable bond, this can be dangerously misleading. A savvy investor ignores the YTM and instead calculates the yield to call (YTC)—the total return you would receive if the bond were called on the earliest possible date. For any callable bond trading above its par value, the most conservative and realistic yield to consider is the yield to worst (YTW). This is simply the lowest possible yield you can receive, whether the bond is held to maturity or called on any of the dates listed in the call schedule. A core tenet of value investing is preparing for the worst-case scenario, and the YTW is the perfect tool for this.

• Always Read the Fine Print: Never buy a bond without first checking for a call provision and its schedule. This information is a non-negotiable part of your due diligence.
• Focus on Yield to Worst: If a bond is callable and trading at a premium, calculate the YTW. This is your most likely return, and the number you should use to compare it with other investment opportunities.
• Demand a Higher Yield: A call feature is a risk to you and a benefit to the issuer. Therefore, a callable bond should offer a higher coupon rate than a similar non-callable bond to compensate you for that risk. If it doesn't, walk away.