Legal Definitions - call of the roll

A call premium is an additional amount of money that a company or other entity pays to its bondholders when it decides to buy back its bonds before their scheduled maturity date. This extra payment serves to compensate bondholders for the early redemption of their investment, which might otherwise have continued to earn interest for a longer period. It represents the difference between the price at which the issuer buys back the bond (known as the call price) and the bond's original face value (or par value).

• Example 1: Corporate Refinancing

  Imagine "Tech Innovations Inc." issued bonds five years ago with a 7% annual interest rate. Since then, market interest rates have dropped significantly, and the company can now borrow money at only 4%. To reduce its interest expenses, Tech Innovations Inc. decides to "call" its existing 7% bonds, buying them back from investors. According to the bond's terms, they must pay a 2% call premium on top of the bond's face value. This 2% is the call premium, compensating bondholders for having their high-interest bonds redeemed early, forcing them to reinvest at lower current rates.

• Example 2: Project Completion and Debt Reduction

  A city government issued municipal bonds to fund the construction of a new public library. The bonds had a 15-year maturity. However, due to efficient project management and unexpected grant funding, the library was completed under budget and ahead of schedule. The city now has surplus funds and decides to pay off a portion of its bond debt early to save on future interest payments. When they call these bonds, they pay a pre-agreed 1.5% call premium to the bondholders, reflecting the early termination of the investment.

• Example 3: Strategic Corporate Restructuring

  "Global Conglomerate Corp." acquires a smaller competitor, "Regional Manufacturing Co." As part of integrating the acquired company's finances, Global Conglomerate decides to consolidate all outstanding debt. Regional Manufacturing Co. had issued callable bonds with a 10-year maturity, and the terms included a call premium that decreased over time. Since the bonds are being called relatively early in their life, Global Conglomerate pays a 3% call premium to Regional Manufacturing Co.'s bondholders, as stipulated in the original bond agreement, to facilitate the debt restructuring.