Calls in arrears and calls in advance refer to the timing of payments for calls made on shares of stock. A call is a demand made by a company to its shareholders to pay additional money for their shares, usually in the form of a callable preferred stock or a bond. “Calls in arrears” refers to payments that are due after a call is made, while “calls in advance” refers to payments that are due before a call is made. This means that in case of calls in arrears, shareholders are only required to pay the additional amount when the call is actually made, making it less risky for shareholders. In contrast, calls in advance require shareholders to pay the additional amount upfront, regardless of whether the company actually calls the shares, making it riskier for shareholders.
Calls in Arrears
A call in arrears is a type of call made by a company on its shareholders, where the shareholders are required to pay an additional amount for their shares after the call is made. This means that the company has the right to call the shares at any time, but the shareholder is only required to pay the additional amount when the call is actually made. This type of call can be seen as less risky for shareholders, as they only have to pay the additional amount if and when the company actually calls the shares. Additionally, the company may call shares in arrears when they need additional funds to support their business operations. The payment of calls in arrears is generally less frequent than in advance calls.
Calls in Advance
A call in advance is a type of call made by a company on its shareholders, where the shareholders are required to pay an additional amount for their shares before the call is made. This means that the shareholder is required to pay the additional amount regardless of whether the company actually calls the shares. This type of call can be seen as riskier for shareholders, as they have to pay the additional amount upfront, even if the company never calls the shares. Additionally, the company may call shares in advance when they are certain that they will need additional funds to support their business operations in the future. The payment of calls in advance is generally more frequent than in arrears calls.
The Main Differences
The main difference between calls in arrears and calls in advance is the timing of the payment.
Calls in arrears:
- Payments are due after a call is made.
- Shareholders only have to pay the additional amount if and when the company actually calls the shares.
- Less risky for shareholders as they only pay if the company calls.
- The payment of calls in arrears is generally less frequent than in advance calls.
Calls in advance:
- Payments are due before a call is made.
- Shareholders are required to pay the additional amount regardless of whether the company actually calls the shares.
- Riskier for shareholders as they have to pay the additional amount upfront, even if the company never calls the shares.
- The payment of calls in advance is generally more frequent than in arrears calls.
Another important difference is that the company may call shares in arrears when they need additional funds to support their business operations, while the company may call shares in advance when they are certain that they will need additional funds in the future.
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Examples of Calls in Arrears and Calls in Advance
An example of a call in arrears would be a company issuing callable preferred stock with a feature that allows the company to call the shares at any time, but the shareholders are only required to pay the additional amount when the call is actually made. This means that if the company never calls the shares, the shareholders would never have to pay the additional amount.
An example of a call in advance would be a company issuing bonds with a feature that requires the bondholders to pay an additional amount on a regular basis, regardless of whether the company calls the bonds or not. This means that the bondholders would have to pay the additional amount even if the company never calls the bonds.
Another example would be a real estate investment trust (REIT) that has a call provision that allows the REIT to buy back shares at a premium after a certain period of time. In this case, the call in arrears would be the REIT buying back shares at a premium after a certain period of time, while the call in advance would be the REIT buying back shares at a premium before that certain period of time.
It’s important to note that the examples mentioned above are not exhaustive and specific rules and regulations may vary between different countries, states or even companies.
Comparison Table
| Calls in Arrears | Calls in Advance |
| Payments are due after a call is made | Payments are due before a call is made |
| Shareholders only have to pay the additional amount if and when the company actually calls the shares | Shareholders are required to pay the additional amount regardless of whether the company actually calls the shares |
| Less risky for shareholders | Riskier for shareholders |
| The payment of calls in arrears is generally less frequent than in advance calls | The payment of call in advance is generally more frequent than in arrears calls |
| The company may call shares in arrears when they need additional funds to support their business operations | The company may call shares in advance when they are certain that they will need additional funds in the future |
Conclusion
In conclusion, calls in arrears and calls in advance are two different types of calls made by a company to its shareholders. The main difference between the two is the timing of the payment. Calls in arrears are payments that are due after a call is made, while calls in advance are payments that are due before a call is made. This makes calls in arrears less risky for shareholders, as they only have to pay the additional amount if and when the company actually calls the shares, while calls in advance are riskier for shareholders, as they have to pay the additional amount up front regardless of whether the company actually calls the shares. Both types of calls have different scenarios where they can be used by the company, calls in arrears for immediate funding needs, and calls in advance for planned future funding needs. It’s important to understand the terms and conditions of the call provision before investing in any callable securities.
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