For premium bonds in the US (ie, bonds trading at a price over par) with a call option, why are they more likely to be called than a bond trading at a discount?

1 Answer 1


If a bond is trading at a discount, it is cheaper for the issuer to buy back bonds on the open market than to call the bond. (Calling a bond generally requires the issuer to either pay the par value, or pay a premium over par value.) Thus, it rarely makes sense for an issuer to call a bond that is trading at a discount. (The exceptions tend to be when an issuer wishes to do something that would violate a bond covenant, such as a leveraged buyout.)

By process of elimination, it is more likely that an issuer will exercise a call option on a bond that is trading at a premium over par.

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