Question

Why is a call provision in a bond indenture is considered an option? Whose option is it?

Answer 1

The call provision in a bond is a provision to the seller/issuer of the bond to buy back  the bond from the bond holder before the bind matures ,in case the interest rate falls.

The bond issuer has the option to refinance the bond at a lower rate of interest by calling the bond from the bond holder before the bond matures in times of falling interst rates.

It leaves the bond holder with reinvestment risk, as the bondholder will now have to invest the money, at a lower rate of interest. . Callable bonds pay a higher yield than comparable non-callable bonds to compensate for the presence of the provision.