A call option on a bond, in the context of bond terms and corporate actions, is a provision that gives the issuer the right, but not the obligation, to redeem the bond before its maturity date. A bond carrying this feature is a callable bond. The dates on which the right can be used and the price payable on each are set out in the call schedule, and the price is known as the bond call price. It is distinct from a traded call option on a bond, which is a derivative.
Issuers exercise the call when they can refinance at a lower rate, which is why callable bonds pay a higher yield than comparable bonds without the feature. When a call is exercised, the issuer gives notice and holders are repaid through an early bond redemption. The mirror image, a right held by the investor, is the put option on a bond.