Doomsday call option

Doomsday call option is a type of an option that allows the issuer to insure themselves against interest rate risk by early redemption of the bond. When the option is executed, the yield on the bond decreases, because the circulation period of the issue is reduced, which entails a decrease in the total interest payable. A doomsday call is also called a “Canadian call” because it is often included in Canadian corporate issues.

In the market, this type of call option is rarely exercised. However, in the event of a decrease in interest rates, it is beneficial for the issuer to use the doomsday call option in order to issue a new bond issue at lower rates, which has a positive effect for the issuer. The grim name comes from the fact that the investor risks losing a higher coupon rate if the issuer exercises this option. However, for bonds with an embedded “doomsday call” option, it is determined in advance what the bondholder will receive if the call option is exercised, thus protecting the investor. Typically, the terms of a call option specify a repayment for a certain amount, which is either the spread on the yield of government bonds, or the face value (depending on which value is higher).

Example of such paper with the Doomsday call included is Manulife Financial Corporation, 7.768% 8apr2019, CAD .