Back in the early 1980s, when interest rates peaked, many investors bought 30-year bonds that had coupon rates of 12 percent or more.
It seemed like a great deal, and many of the buyers thought they could simply sit back and collect interest payments for the next three decades.
Now 10 years later, many of those high-yielding bonds are being "called." In other words, investors are being forced to sell them back prematurely.
So instead of being locked into sky-high yields, those people now must reinvest that money. And with interest rates low, they will never match the yields they were forced to give up.
For people whose bonds are being called, knowing what to do is crucial. It's also important to monitor your bonds if you think they could be called. Otherwise, your money may sit in limbo, earning no interest, until you respond.
Experts say that about $110 billion in bonds will be called this year, up from $74 billion in 1991. That would be a record amount. Also, above-average recalls are expected in '93 and '94.
Bond calls usually occur when interest rates plummet, as they have recently. That's because states, municipalities and corporations that issue bonds can issue new ones at lower interest rates, then use the proceeds to pay off the higher-rate bonds.
Each bond is different, but most can be called after five or 10 years if certain conditions are met. The terms for a call are spelled out on the bond certificate.
Investors are usually notified by mail when a bond is about to be called. The notice often comes by mail 30 to 45 days before the call. But not always.
In most cases, the letter will list the name of a firm that is acting as "trustee." Your bond should be sent to that trustee well before the call date.
If you don't send in your bond, you would not be paid, and no interest payments would be made after the call date.
You also may want to complete Form W-9 and send that in, too. The W-9 is an IRS form that certifies that no federal income tax is due on the money you are getting back. If you don't include a W-9, the trustee may withhold up to 20 percent of your earnings.
If a bond is held at a brokerage firm, then that firm would be responsible for all calls. The firm then should notify the owner so that he or she can decide how to reinvest the money.
If you own "bearer bonds," they may present a special problem. Bearer bonds are not registered under anyone's name; they pay interest to anyone who is holding them. Since they have no specific owner, a call notification would be impossible. Therefore, the bearer must look for call notices in various financial publications.
There are several companies that will notify investors, for a fee, when bearer bonds, or any other type, are being called. (Your broker may have some names and telephone numbers.)
Bond calls often occur on dates when interest or principal payments are due, which is semiannually in most cases.
Here are some tips that might signal a call:
* Watch out if your bond has a coupon rate of 8 percent or higher. The issuer may want to refinance at a lower rate.
* Many of this year's calls will be for bonds issued in 1982. That's the year when interest rates peaked.
* Residential-mortgage bonds also are being called in large numbers. These bonds were issued by private housing developers and backed by governmental agencies.
If you are in the market for bonds, pay close attention to the earliest possible call date. Since many bonds are called, that date may determine your final yield.