What Is Hard Call Protection?

Hard call protection, or absolute call protection, is a provision in a callable bond whereby the issuer cannot exercise the call and redeem the bond before th🍒e specified date, usually three to five years from the date of issuance.

Understanding Hard Call Protection

Investors who purchase bonds are paid interest (澳洲幸运5官方开奖结果体彩网:coupon rate) for the duration of the bond's life. When the bond matures, bondholders are repaid the principal value equivalent to the 澳洲幸运5官方开奖结果体彩网:face value of the bond. Interest rates and bond prices have an inverse relationship—when the bond price declines, then yields rise, and vice versa. While bondholders prefer to invest in bonds with higher rates, as this translates into high interest income payments, issuers would rather sell bonds with lower rates to reduce their 澳洲幸运5官方开奖结果体彩网:cost of borrowing.

Thus, when interest rates decrease, issuers will retire the existing bonds before they mature and refinance the debt at the lower interest reflected in the economy. Bonds that are repaid prior to maturity stop paying interest, forcing investors to find interest income in some other investment, usually at a lower interest rate (澳洲幸运5官方开奖结果体彩网:reinvestment risk). To protect callable bondholders from having their bonds repaid too early, most 澳洲幸运5官方开奖结果体彩网:trust indentures include a hard 澳洲幸运5官方开奖结果体彩网:call protection.

A hard call protection is the period of time during which an issuer cannot "call" its bonds. Callable corporate and municipal bonds usually have ten years of call protection, while protection on utility debt is often limited to five years. For example, consider a bond that is issued with 15 years to maturity and a five-year call protection. This means that for the first five years of the bond's life, regardless of the movement of interest rates, the bond issuer cannot redeem the bond by repaying the bond's principal balance. The hard call protection serves as a sweetener as it guarantees investors will receive the stated return for five years before the bond is "free" to be called.

Since the investor is taking the risk of the bond being called prior to maturity, brokers will usually provide 澳洲幸运5官方开奖结果体彩网:yield-to-hard call as well as 澳洲幸运5官方开奖结果体彩网:yield-to-maturity figures when a callable bond is being purchased. An inve💎stor should base their decisions on the lower of these two yields, which is usually t🍌he yield to the hard call date.

After the hard call protection period expires, the bond may continue to be partially protected by 澳洲幸运5官方开奖结果体彩网:soft call protection. This feature requires certain conditions to exist before the bond can be called. Soft call protection is usually a premium to par that the issuer must pay to call in the bonds before maturity. For example, the issuer may be required to repay investors a percentage over the full face value (say 105%) of the bond on the first 澳洲幸运5官方开奖结果体彩网:call date. A soft call provision may also specify that the issuer cannot call a bond that is trading above its issue price. In the case of 澳洲幸运5官方开奖结果体彩网:convertible callable bonds, a soft call protection would prevent the issuer from calling the bond until the price of the underlying stock rose to a certain percentage above the 澳洲幸运5官方开奖结果体彩网:conversion price.

Callable bonds pay a higher return because of the risk that the issuer will redeem them before maturity. A 澳洲幸运5官方开奖结果体彩网:retail note is an example of a type of 💙bond that commonly includes hard ca𒊎ll protection.