In the case of a premium callable bond, what situation is least beneficial for the customer?

In the case of a premium callable bond, the situation that is least beneficial for the customer occurs when the bond is called at par value in five years. This scenario is particularly disadvantageous because a callable bond is typically issued at a premium, meaning the customer initially pays more than its face value due to the higher interest rate it offers compared to prevailing rates.

If the bond is called at par value, the investor receives only the face value of the bond, rather than the higher premium price they paid. This cancellation at par limits the investor's potential gains, particularly if they were expecting to hold onto the bond longer to benefit from the higher interest payments. Essentially, when the bond is called, the investor forfeits future interest income and the opportunity to recoup the premium they paid.

In contrast, if the bond is sold in the open market, matures with full interest, or is converted into shares of stock, the investor has opportunities to either realize gains from market conditions or receive full interest payments, which would be more beneficial outcomes compared to having the bond called at par value.