Think about every period as its own loan. Say I lend you $5,000 at 10% interest. One period later, you owe me $500 immediately, and you still owe me the $5,000 to pay back whenever. So let’s say you pay me $1,000 of that $5,000. You’ve given me $1,500, and you owe me another $4,000. The next period, you owe me $400 no matter what, but you can elect to pay more than that again. So let’s say you do, and you give me $4,400 to clear your debt. At no point was I making less than 10% on the money I lent you, but I made 10% on $4,000 the second period, and I don’t get to collect interest from you anymore. So, I’ve collected $900 in interest, but I originally gave you $5,000. I had to do something with the $1,500 you paid me in the first period which includes a prepayment. If I didn’t invest it, or I invested it at less than 10%, I’m not making 10% on all my money anymore. I’m still getting 10% on whatever you haven’t paid off, but I want 10% on all my money.
Now apply the same concept to a bond. You invest your money in a bond because you like getting the coupons at whatever interest rate. But now the bond issuer takes back the bond and just gives you cash. You made the coupon rate on the face value of the bond for as long as you held it, but the party’s over once he calls the bond, and you have to put your money elsewhere. Elsewhere, though, isn’t as attractive as the first bond you bought, so now you’re making a smaller return over the rest of the life of the bond compared to what you otherwise would have. Are you getting “less than anticipated”? Yes, because you anticipate that the bond won’t be called (or will be called with probability less than 1). Is your holding period return less than the coupon rate? No, because you get the rate for as long as the bond is yours. The difference now is your holding period is reduced, so your future investment isn’t going to be as good as the deal you already had, and therefore your total return over the maximum life of the bond is going to be less than the return of holding the bond the whole time.