Call protection provision restricts the bond issuer to redeem the issued bond before its maturity.

This time period is also known as the deferment period since issuing entity cannot redeem the bonds.

Call protection provision is stated in the bond indenture that outlines the terms of the bond.

Hard Call Protection- The first type of call protection offered to the bondholders. For example, a 30-year bond may consist of a hard-call option that allows the issuer to buy back the bonds after the first 10 years of the bond’s life. This gives the holder an assurance to earn interest on the bond for at least the first 10 years of the life of the bond.

Soft Call Protection- The soft call provision is in addition to the hard call that governs the time frame during which the bonds are called. Once the hard call provision lapses the soft call provision requires the issuer to pay a premium over and above the bond’s face value if the bond is redeemed before maturity.

For example, in a 30-year bond with 10-year hard call protection the issuer might pay a 5% additional premium if the bond is redeemed in the 10th or 11th year, a 3% premium if the bond is redeemed in the 12th or 13th year and so on. over the bond’s face value.

101 soft call protection is a provision for the lenders/investors in securities that requires a payment of 1% premium to the investor at an early stage of redemption of a callable bond.

Callable corporate and municipal bonds have ten years of call protection whereas utility bonds are limited to five years of call protection.

Generally issuing entities call back their bonds when prevailing market rates decrease unless there is a call protection provision in place. Such covenant in the agreement allows the investors to gain the benefit of appreciation in the value of their issued securities.

Call protection benefits bondholders when interest rates are diminishing. The bond repurchased by the issuer only after the call protection period is termed as a deferred callable bond.