Call protection refers to provisions that are contained in the terms of agreement associated with a callable bond. Essentially, call protection refers to the period of time in which the debtor cannot exercise the privilege of calling for an early redemption of the security from the investor. In some cases, call protection also outlines the rights and privileges of the bond or holder, and how they relate to the conditions that must exist in order for the security to be redeemed before the maturity date.
Callable bonds are constructed to allow the issuer of the loan or bond to call for the redemption of the security. In order to ensure that the investor who chooses to purchase the bond can anticipate a reasonable return on his or her investment, terms and conditions are included that spell out how and when the debtor can call for redemption. Generally, this includes specifying a period of time that must pass before the debtor can entertain the possibility of calling the bond. For example, ten-year bonds may include the proviso that they cannot be called until at least five years from the purchase date has passed. The bondholder is thus assured of receiving at least some return on the investment, receiving the interest accrued up to the date that the debtor chooses issue the redemption order.
Along with setting the perimeters of how early the bond can be called, call protection often defines what type of a premium the holder will receive from the debtor. This premium is compensation above and beyond the interest accrued up to the date of the call. By including this type of detail in the call protection, it is possible for the investor to project the approximate return in the event that the bond is called early.
Call protection may also include information about any penalties that the debtor may incur as a result of issuing an early call. This information is helpful for the debtor, in that it is possible to weight the cost of calling the bond at any given point in the maturation process, rather than allowing it to reach full maturity. In general, call protection will include provisions that are helpful for both the investor and the debtor, providing both parties with a solid understand of what will take place in the event of an early call.
