Beware of Unwelcome Calls

YOU MAY have an unpleasant surprise in store if you own high paying bonds that were originally issued in the early 1980s: those securities could soon be called in and paid off. Yes, you would get back all the money you paid for the bonds, but you would lose those nice, high regular interest payments.

Interest rates on municipal bonds, for example, hit their highs of more than 13% in 1982. When yields fell, state and local government agencies paying those 13% rates redeemed their older bonds as soon as they could and sold new bonds at lower rates. These early payoffs are known as "calls."

Investors generally are protected from calls for at least 10 years after the bond is issued. But some bonds may be redeemed within five years, or even less. A stockbroker or a financial planner can tell you whether your bond is among the ones at risk of an early redemption.

If you are considering buying a new bond, it's probably wise to pick one that offers you call protection for at least 10 years. That way you can lock in today's interest rates for well into the future. This would become especially valuable if and when interest rates decline.

Investors in bond unit trusts also need to watch call provisions, especially if the trust touts an extraordinarily steep yield. Such trusts often are invested in many of the older high interest bonds, which may be called. You would be wise to check the call dates on bonds listed in the prospectus of the trust to see if you are adequately protected. Otherwise, you could end up with a much lower yield than the trust advertised.