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Definitions: A call provision allows the initial borrower of the bond to pay off the bond...

Definitions: A call provision allows the initial borrower of the bond to pay off the bond early. A call premium is an additional fee that the borrower must pay in order to call it off early. Most call provisions almost always include call premiums.

Now that you have the definitions... explain to me WHY you usually include a call premium if you have a call provision in the bond. What is the premium accounting for?

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Answer #1

Most call provisions generally include call premium Because of the concept of 'Time Value of Money'. Sometimes the security has a maturity value so when the security is going closer to its maturity period, its premium decreases. At the initial stage of time, the Premium has a high value because of the concept of Time value of money. At Maturity period, the rule of convergence is applicable which decreaes the value of premium in calls.

Note:- Premium is the amount that is over and above the Fair Value of Bond/Security/Asset.

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