Call premium is the amount by which a security's call price exceeds its stated par or face value. When an issuer exercises its right to redeem a callable bond or preferred stock before its normal maturity, or before it would otherwise be retired, the issuer must pay holders not just the par amount but this additional premium on top, compensating them for having the investment cut short earlier than expected.
Investors accept a lower yield or a lower price on a callable security precisely because the issuer retains the right to call it away, which creates reinvestment risk for the holder, typically at exactly the moment interest rates have fallen and reinvesting the proceeds elsewhere has become less attractive. The call premium exists to partially offset that risk, giving holders some extra compensation if the call right is actually exercised, rather than leaving them with nothing beyond the bare face value they would have eventually received at maturity anyway.
Call premiums are commonly structured on a declining schedule written into the bond indenture or preferred stock terms, starting relatively high in the years shortly after issuance and shrinking gradually, often reaching zero by the time the security approaches its final maturity or a specified later call date. This structure reflects that an early call causes more disruption to an investor's expected return the sooner it happens after issuance, and progressively less disruption as the security's remaining life shortens anyway.
When an issuer calls a bond and pays the resulting call premium, it compares the total cash paid to redeem the bond against the bond's carrying amount on its books at that date; if the redemption payment exceeds carrying amount, the issuer recognizes a loss on the early retirement, and if it is lower, a gain, with the call premium itself being one of the main reasons redemption payments often exceed carrying value in practice.
Why the concept matters to investors
Investors pricing a callable security have to weigh not just its coupon or dividend rate but the realistic possibility of an early call and the call premium they would receive if that happens, since a security likely to be called soon after a favorable premium window opens behaves quite differently, in terms of expected holding period and return, than one with no meaningful call risk at all.
A simple worked example
A $1,000 face-value bond with a call price of $1,030 has a call premium of $30. If the issuer calls the bond five years before maturity, it must pay the holder $1,030 rather than the $1,000 face amount, with that extra $30 compensating the holder for having the investment redeemed earlier than its stated maturity date would have otherwise required.
Most indentures and preferred stock agreements build in a declining call premium schedule, where the premium an issuer must pay drops each year the security remains outstanding, often reaching zero once the security is close enough to maturity, or to a stated par-call date, that there is little remaining time value left to compensate for. This declining structure reflects the fact that an early call becomes progressively less disruptive to an investor's plans the closer the security already is to maturing or being called anyway, so the compensation needed to make an early redemption fair to the holder naturally shrinks along with it.