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Borrowers, such as corporations and governments, like to have the opportunity to repay debt early, so they frequently incorporate a call price into the terms of a bond issue. These borrowers are then able to buy a bond issue back at the call price, and replace it with a cheaper one by calling in the current bond issue.
Most corporate bonds are callable, but a few are non-callable. The call price is equal to the par value of bond plus a call premium. Call premiums can be set in a variety of ways. For example, a call premium might equal one year’s worth of interest. This call premium may be amortised over the life of the bond issue so that it approaches zero as the bond matures.
Some bonds are non-callable for an initial period of time, and then become callable. When a company calls a bond issue, it is almost always the case that the company makes substantial economic savings in terms of future interest payments, at the expense of the bond investor who will be forced to reinvest his or her money at a lower interest rate. Once a bond has been called, the issuer has no legal obligation to make any interest payments after the call date.
A bond for XYZ Corp. matures in 25 years at a par value of $1,000. It is noncallable for the next ten years, and thereafter it is callable at a price of $1,050.