Abstract

The Call Provision in Loan Agreements

Nearly all loan agreements give the debtor Call Provision but the investor’s call risk varies, depending on the terms of loans and the categories of the debtors. The call risk of new issues grows as the nominal interest increases. For this reason, the possible premature redemption of loans is at present a very topical problem. Experience during the Sixties indicates that, for example, mortage banks begin to serve notice of termination of their usually “longmaturity” loans as soon as there is an interest gap of only !/2®/o, i.e. as soon as the market rate is only !/2 %/o below the nominal interest. This “conversion-warranting interest difference” is dependent on several variables. Apart from the costs accruing in the event of a conversion, the residual term and the amount of the tax burden on the issuer determine a loan’s “maturity for conversion”. The conversion maturity of a security can be established unequivocally by actuarıal methods. With the aid of suitable formulae the issuer can calculate the benefit of a possible conversion and the investor can draw conclusions as to the issuer’s possible modes of behaviour