Call Risk

It is a risk that the issuer can recall the bond before the date of its maturity. The chance of a call risk increases if interest rates fall.

Usually corporate bonds have call provisions that allow the issuer of the bond to redeem the securities before they mature. Usually the reason why issuers use the call provision in order to take advantage of falling interest rates. The issuer buys back the higher coupon-paying bonds, and reissues the bond with lower coupon rates. This is done effectively to reduce the company‘s cost of borrowing.

However, though this is profitable for bond issuer, it puts bondholders to the risk of reinvesting their funds in a bond which pays lower interest.