A call risk is the risk that the issuer of your bond will redeem it (a process known as "calling") before its maturity. If this happens, you could lose out because you didn't get all the interest you had expected.
You were supposed to get an 8% coupon for 10 years. But after two years, the bond is called. You lose eight years of profits from the bond. Meanwhile, you could have sold the bond if interest rates went down, making your 8% more attractive to other investors. If a bond is called, you lose out on the chance to sell that bond at a profit.
The call risk measures the possibility that the issuer might go through this process. It takes into account a) whether the bond is callable, b) the process needed to call it (what restrictions the issuer has), and c) the relationship between prevailing interest rates and the interest rates you are getting on the bond. So if a bond is callable and there are very few restrictions on the issuers ability to call it and the interest rates you are getting on the bond are much higher than the current prevailing rates (so it would be in the issuer's interest to call the bond and issue a new set at a lower rate), then the call risk is very high.
Related or Semi-related Video
Finance: What are Convertible Bonds?9 Views
Finance a la shmoop what are convertible bonds? okay there's a joke about the
Inquisition in here somewhere or maybe something about Cossacks and 17th
century Russia what do you think animated musical or maybe a King Henry [King Henry VIII appears]
thing but yeah all that's different kind of conversion way more pedantically a
company might be having a hard time selling or issuing its bonds to Wall [Man with company briefcase for head meets man with Wall Street briefcase for a head]
Street in order for them to close the deal with their stock trading today at
25 bucks a share they might say well these bonds are convertible into 20 [Man with company for a head discussing bonds]
shares of our stock that is they would have a single thousand dollar unit of
that bond and it would convert into 20 shares which would then value the shares
at 50 bucks either thousand divided by 20 there's 50 it's an advanced calculus
sorry if you didn't have it which would sort of be you know the over/under price
at which bondholders would start to seriously look at converting their nice
safe bonds into those risky pesky equities well why would a company offer
convertible bonds instead of you know just vanilla bonds well if they were [Man discussing convertible bonds]
stuck paying 6% interest on just bonds but really could only afford to pay 4%
well they might get the interest rate discount by throwing in that equity
kicker in the bonds having that convertibility feature yes they would
suffer dilution at 50 bucks a share but that price is double and change where
the stocks out here so the company is probably thinking that it wouldn't mind
some dilution from these bonds being converted up there in stock price right [Arrow points to stock value mark on graph]
and remember the bonds pay the 4% interest along the way until they are
converted the moment those bonds are converted into equity well then the debt
on the balance sheet of the company and its obligation to pay that 4% yearly [Company balance sheet and interest highlighted]
interest goes mercifully away they print 20 more shares for each bond converted
and yes those shares may pay a dividend but as far as the convertible bonds go
they are thereafter converted and saved and remember Jesus Saves but Moses
invests
Up Next
Forced conversion: the idea that the issuer of a bond has the right to force the conversion of that bond into common stock.
What is convertible debt? Convertible debt is a type of bond that’s issued by a corporation. Ownership of these bonds means that the holder has t...
What is a Busted Convertible? A busted convertible is a convertible bond that will never be converted to stock because the underlying stock price i...