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Finance Glossary

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Call Protection


Call protection is the fine print in the paperwork. When you buy a bond, this language protects you, the buyer, from companies trying to get out of paying you higher interest. Even if the interest drops, the company cannot repay the premium early and issue bonds at a lower interest rate, fleecing you out of profits. Usually, the company has to wait at least five years before calling its bonds and issuing cheaper bonds. 


Let's say interests are high and a company has to raise money and pay 8% interest on 20-year bonds. Then the Fed lowers rates, and the company could reissue new bonds and just pay 5.5% interest. It would want to call its 8% bonds and issue new, cheaper ones. The investor in the bonds is "protected" with call protection which might, say, prohibit the company from calling its bonds for 5 years from issuance.