What is a Call Provision?

A call provision is an option built into a bond indenture, allowing the issuer to redeem bonds prior to their scheduled maturity date. In exchange, the issuer pays a premium over the face value of the bonds. The issuer uses this provision when interest rates decline, so that it can re-issue new bonds that offer a lower interest rate. The presence of a call provision makes a bond less valuable to investors, since their ability to earn a high return for a protracted period of time could be curtailed. Consequently, bonds with call provisions typically trade at a higher effective interest rate, to compensate investors for their uncertain future return on investment.

What is a Call Protection Provision?

A call protection provision in a bond indenture protects the interests of investors by not allowing the issuer to redeem bonds until a certain period of time has passed, thereby locking in the investor return through that date range. A call protection provision that delays any possible redemptions to a distant date is more valuable for investors.