A:

A callable bond provides the issuer (borrowing entity) with an option to redeem the bond before its original maturity date. The ability to call a bond gives the issuer a way to respond to falling interest rates, a circumstance that allows the issuer to refinance this debt at a lower rate of interest.

Callable bonds often pay investors a higher interest rate than noncallable bonds to compensate for uncertainty and also may pay a premium for early termination of the investment. If a callable bond's coupon (interest rate) is higher than prevailing rates at the time of the call, investors won't be able to reinvest their capital in a comparable bond at as high a yield.

While it might seem reasonable to assume that in a declining interest rate environment a callable bond's price would exceed the bond's call price, experience tells us that this isn't a given. Investors need to know that there is a risk that the price at which the bond is redeemed could be below the bond's current price.

For more insight, read Call Features: Don't Get Caught Off Guard and What are the risks of investing in a bond?

RELATED FAQS
  1. What are the advantages of investing in a callable bond?

    Learn about the biggest advantage to an investor of purchasing a callable bond, which is that it almost invariably pays higher-than-market ... Read Answer >>
  2. Why is a premium usually paid on a callable bond?

    Understand the nature and characteristics of callable bonds, and specifically why those factors lead issuers to offer a premium ... Read Answer >>
  3. What happens to the price of a premium bond as it approaches maturity?

    Learn how bonds trade in regard to premiums and discounts, and how bond prices shift closer to par value as bonds approach ... Read Answer >>
  4. A corporate bond I own has just been called by the issuer. How can a company legally ...

    Bond issues can contain what is referred to as a call provision, which is a right afforded to the issuing company enabling ... Read Answer >>
  5. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
Related Articles
  1. Investing

    Callable Bond

    Find out how callable bonds are different from regular bonds and what benefits they have for investors.
  2. Investing

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
  3. Investing

    When Your Bond Comes Calling

    Callable bonds can leave investors with a pile of cash in a low-interest market. Find out what you can do about it.
  4. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  5. Managing Wealth

    Finding Non-Callable Bonds No One Can Take Away

    Low interest rates have led to nearly $250 billion in bonds being called in, leaving investors in the lurch. How to find non-callable bonds.
  6. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  7. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  8. Investing

    Understanding Redemption

    In the investing world, redemption refers to cashing out the value of bonds or mutual funds.
  9. Investing

    How Rising Interest Rates Impact Bond Portfolios

    A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider.
RELATED TERMS
  1. Callable Bond

    A bond that can be redeemed by the issuer prior to its maturity. ...
  2. European Callable Bond

    A bond that can be redeemed by the issuer at a predetermined ...
  3. Hard Call Protection

    The period in the life of a callable bond during which the issuing ...
  4. Call Provision

    A provision on a bond or other fixed-income instrument that allows ...
  5. Callable Security

    A security with an embedded call provision that allows the issuer ...
  6. Call Privilege

    The provision in a bond indenture that gives the bond issuer ...
Hot Definitions
  1. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  2. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  3. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  4. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  5. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  6. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
Trading Center