To figure out when a call price comes into play, we should first understand what a callable bond is. Think of it as a type of bond where the issuer can "call it in" before it reaches the official maturity date. This usually happens when the issuer wants to protect itself on the off chance that interest rates will decline and they will be stuck paying out a higher rate of interest than necessary. In order to entice customers to buy a callable bond, they usually start out with a higher interest rate than other similar (but non-callable) bonds are paying.
The bonds will also state what the call dates will be and what they will pay as a call price if they do call in the bonds early. The call price will be higher than the original price of the bond as the issuer wants to try and make up for its customers losing out on the higher interest rate payments if the bond had gone to maturity.
Let's say the Ohio State University wants to build more fitness centers for students in order to keep up with what private universities are offering. So, they decide to raise the funds by issuing a $3,000 callable bond with a 5% coupon (interest) rate and a maturity date of January 1, 2020. However, there's a call date of October 31, 2017 with a call price of $3,080. Because this bond issue has a call date, the 5% interest is probably better than what is being offered by similar-risk bonds and maturity dates.
Suppose that in the fall of 2017 interest rates in the market tank, so the University wisely decides to call in the 5% bonds and issue 3% bonds. They will pay their investors a premium of $80 as a call price per bond ($3,080 - $3,000) to help make up for missing out on the higher interest rate for three years. The University wants to refinance their higher interest bonds for lower interest ones in order to incur less debt. Also, when interest rates go down, the price of a bond goes up, so the university can issue new bonds at a lower interest rate and get a higher price.
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Finance: What is a Strike Price?40 Views
Finance a la shmoop what is a strike price well before going
even a second further with this video be sure you've seen our Steven Spielberg [Introduction to a movie at the cinema directed by Steven Spielberg]
directed what is a stock option video here are the reviews from variety.. well
to review a stock option is the right to buy a share of stock for a set price
over a given period of time so let's say you were granted an option to buy a [Graph of amazon stock prices]
share of Amazon stock in 2015 when the stock was around 400 bucks a share the
option lasts as long as you work at the company in good standing or after 10
years have passed which ever ends first well one day you decide you want another job [Woman signing a contract]
your contract says that if you're no longer an employee with the company then
you have 90 days in which to either buy out your option that is to buy the
option and then own the stock or just forfeit the option [Woman underlining words on a contract]
well since Amazon is now at a thousand bucks a share you obviously don't want
to forfeit the option to buy that share of stock for 400 bucks but you note that
your many friends who joined apcray.com at a high price a high strike price which
creators know they're stock while they're doing a lot of option forfeiting
that is their options ended up being worthless so you've got a lot to think [Man holding out a bag of dog poo]
about here this is Amazon not apcray so you want to buy out your option so
what happens well you were granted your own options at the price Amazon stock [Amazon box falls off shelf]
was trading at the day you joined the company it was 400 bucks a share so
that's a strike price that $400 is the price you pay to buy a share of stock at
some point there in the future that strike price has nothing to do with [Protestors holding signs outside an Amazon building]
unions not working got it? all right well in order to buy that stock it's
currently trading in a thousand bucks a share
you pay Amazon 400 bucks and that buys out your option you then own the stock [Man writing a check to Amazon for 400 dollars]
that's it Amazon cancel your option then they give
you a share of actual stock which you now own for as long as you want to own [Man delivering an Amazon box]
it you can sell it immediately and make a
$600 a share profit that's a thousand bucks a share it's trading at now minus the
$400 strike price you just paid to buy out that option got it or you can hold [Grandparent bribing grand-daughter for amazon stock]
onto those shares and you know use it to bribe your grandchildren one day it's
worth like a million dollars a share
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