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?

  1. Under what circumstances might an issuer redeem a callable bond?

    Understand why an interest rate drop usually compels bond issuers to redeem callable bonds and re-issue them at the new, ... Read Answer >>
  2. What risk factors should investors consider before purchasing a callable bond?

    Understand the difference between callable and non-callable bonds and consider all the various risk factors associated with ... Read Answer >>
  3. 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 >>
  4. Why do companies issue callable bonds?

    Learn how callable bonds work, how they include an embedded call option, and understand the additional risks that callable ... Read Answer >>
  5. 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 >>
  6. What are the accounting entries when a company issues a callable bond?

    Learn how callable bonds are treated on balance sheets, and understand why callable bonds often pay investors a premium for ... Read Answer >>
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  1. Callable Bond

    A bond that can be redeemed by the issuer prior to its maturity. ...
  2. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer ...
  3. European Callable Bond

    A bond that can be redeemed by the issuer at a predetermined ...
  4. American Callable Bond

    A bond that can be redeemed by the issuer at any time prior to ...
  5. Hard Call Protection

    The period in the life of a callable bond during which the issuing ...
  6. Bond

    A debt investment in which an investor loans money to an entity ...
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