Definition:
A call premium is the amount by which the call price of a callable bond or preferred stock exceeds its face value. It’s essentially a penalty that the issuer must pay to investors if they exercise their right to call the security early.
Key points about call premiums:
- Callable securities: Call premiums are associated with callable bonds or preferred stock.
- Early redemption: The issuer has the right to call the security early at the call price.
- Premium: The call price is typically at a premium to the face value of the security.
- Investor protection: Call premiums are intended to compensate investors for the potential loss of future income if the security is called early.
Why are call premiums used?
- Incentive: Call premiums can incentivize investors to hold the security to maturity, as they may not want to forego the potential for additional returns.
- Market conditions: Issuers may use call premiums to make callable securities more attractive to investors, especially in low-interest rate environments.
In essence, a call premium is the amount by which the call price of a callable bond or preferred stock exceeds its face value, and it’s intended to compensate investors for the potential loss of future income if the security is called early.
