Question

A company is contemplating a long-term bond issue. It is debating whether to include a call provision. What are the benefi ts to the company from including a call provision

Answer 1

Answer:

In simple words, a call option refers to the provision under which the issuing entity of the stock can repurchase it from the holders at a pre- specified price. For example- Company A issued a security for $100 to X with a 1 year call provision at the call price of $110. This, means Company A can buy back te security from X at a price of $110 after one year.

A call option is an obligation to the holder and a right to the issuer of the security. Thus, the main benefit of using a call option is that if the price of the security in the market after one year exceeds $110 then company a can buyback shares at a discounted price.