If a callable bond is called, what amount does the issuer have to pay?

When a callable bond is called, the issuer must pay the call premium in addition to the bond's face value. This is because callable bonds typically include a provision allowing issuers to pay off the bond early, often to take advantage of lower interest rates or to refinance their debt. The call premium compensates bondholders for the early redemption of the bond, providing them with additional financial security against potential losses that might arise from having their investment returned early.

The face value represents the principal amount the bondholder is entitled to receive at maturity, but since the bond is being redeemed before that point, the call premium is the extra amount that the bondholder receives as an incentive to release their bond. This extra payment is designed to protect investors from the losses they might incur if interest rates decline and they miss out on future interest payments.

Other options do not represent the correct amount that needs to be paid upon calling the bond. The market price at the time of the call reflects the current trading value, which may not encompass the call premium. The initial issuance price is irrelevant at the time of the call as it does not account for market fluctuations or the premium. Lastly, just paying the accrued interest would not satisfy the terms of the bond since the bondholder is