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Finance Glossary

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Call Protection

Definition:

Sort of a condom for your bond returns. CP is a term built into the fine print of a bond offering that generally prohibits the company issuing the bond to repay the premium before the scheduled maturity date until after a certain period of time has passed (in practice, this tends to be 5 years). Consider a high interest rate environment where 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.

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