Call Risk

This is the risk that a bond will be called away from the owner and the funds from the call will have to be reinvested in lower yielding securities. Call risk is of primary concern when interest rates drop. It is at this time that the issuer would like to call the high coupon (high income to the holder) bonds and refinance them with lower coupon bonds. One type of call risk associated with mortgaged-backed securities is prepayment risk. This is the risk that the underlying borrower will pay off their mortgage and the issuer will take the proceeds and call the mortgaged-backed security at par. We have found that sometimes it is appropriate to take on call risk and give up other types of risk.