Call Premium

The call premium is the amount by which the Call Price of a Callable Bond exceeds its Face Value:

$\text{Call Premium} = \text{Call Price} - \text{Face Value}$

It compensates the bondholder for giving up future coupon income if the bond is called early.
The call premium typically declines as the call date approaches maturity, eventually reaching zero at maturity (where call price = face value).
From the issuer's perspective, the call premium is a cost of the call option. Higher call premiums make bonds more attractive to investors but increase the issuer's redemption cost.

Identifying the Call Premium A bond with $1{,}000$ face value is callable at $1{,}030$ after 2 years and at $1{,}015$ after 4 years.

Answer Call premium at year 2: $1030 - 1000 = 30$ . Call premium at year 4: $1015 - 1000 = 15$ . The declining call premium schedule gives the issuer an increasing financial incentive to delay calling, while protecting the investor if called early.