Municipal Bond Forum
Calling bonds at a premium price
Q
A bond broker told me that if an issuer does not call a bond at a premium, say 103, and waits to call the bond at par, the issuer must still pay 103 to the bondholder. This doesn’t sound logical. Did I misunderstand him?
A
James A. Klotz responds:
As you concluded, this is not only illogical, it is inaccurate. Optional “call features” on municipal bonds usually offer a premium initially and systematically decline to 100.00. Theoretically, if the bond is not called at a premium price, the bondholder is compensated by keeping the bond for a longer period of time.
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