Investor Benefits of Callable Bonds

For the investor hoping to receive interest from a bond for many years, a bond call can present a challenge. Now the investor must find another investment to replace the high-interest bond, at a time when the going interest rate is lower. While the investor may be able to find another type of investment paying a comparable return, he or she is unlikely to find a similar bond paying a comparable return.

The call premium

To compensate the investor for this loss of income and the lost opportunity of owning the bond to maturity, the bond issuer sometimes pays the bondholder more than the par value of the bond when it is called. The amount that the issuer pays above the par value is termed the call premium, and often it is part of the price issuers pay for callability. The existence and amount of the call premium usually can be found in the bond prospectus and bond agreement.

An example

The amount of the call premium often approximates one year's interest at the call date. For example, if you own a $1,000 bond paying 9 percent interest annually and the company calls your bond at the call date, you might expect to receive $1,090 for the bond (par value plus $90). Sometimes, the amount of the call premium is reduced each year past the call date.