What is the process by which a bondholder receives an unscheduled payment, including the principal amount and any accrued fixed interest where the issuer (debtor) exercises a call option on the bond?

When a callable bond ( or a bond with call option) is redeemed early, the investor receives the principal and accrued interest earlier than expected. The key risk faced by the bondholder is reinvestment risk, as the returned funds may have to be reinvested at lower prevailing interest rates. • Prepayment risk refers to the issuer’s action of early repayment (more commonly used in loans/MBS context). • For bondholders, the economic risk experienced due to a call is reinvestment risk, which is what exams typically test when options are risk-based.