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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Hard Call Protection

What it is:

Hard call protection is a provision in a callable bond that limits the issuer's ability to exercise the call feature.

How it works (Example):

A callable bond allows the issuer to repay the bond's principal balance before its maturity date with little notice to the holder. For example, if Company ABC has an outstanding callable bond ($1,000 par value) with one year remaining until maturity, it may call that bond and pay $1,000 to the holder in addition to any remaining interest due up to that point. This saves the company from having to pay the remaining years' worth of interest. Companies typically issue callable bonds in anticipation of a decline in interest rates.

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Hard call protection on a callable bond restricts the timeframe in which an issuer is free to exercise a bond's call provision. For example, a given bond's hard call protection might prohibit its issuer from exercising the call option within the first 24 months after issue.

Why it Matters:

Holders of callable bonds assume the risk that they may not receive the entirety of the bond's interest through maturity. Hard call protection is a promise from the issuer that if it does choose to exercise a call, it will refrain from doing so until a specific date. This decreases the call risk encountered by the holders of callable bonds.