What does the call premium of a bond refer to?

The call premium of a bond refers to the additional amount that the issuer must pay to bondholders when exercising their right to call the bond before its maturity date. This premium compensates the investors for the risk they take on the potential early redemption of the bond, which typically occurs when interest rates decline, and the issuer seeks to refinance at a lower cost.

This additional payment is necessary because calling a bond can be disadvantageous for investors who may miss out on future interest payments that they would have received had the bond remained outstanding until maturity. The call premium essentially serves as a form of compensation for this lost interest income and the reinvestment risk inherent in early redemption scenarios. The calculation and specifics of the call premium can vary depending on the bond's terms, but its primary purpose is to balance the interests of both the issuer and the investors regarding the call feature.