Loading the player...

What is a 'Callable Bond'

A callable bond is a bond that can be redeemed by the issuer prior to its maturity. If interest rates have declined since the company first issued the bond, the company is likely to want to refinance this debt at a lower rate of interest. In this case, the company calls its current bonds and reissues them at a lower rate of interest.

BREAKING DOWN 'Callable Bond'

A callable bond means the issuer can return the investor's principal and stop interest payments before the bond's maturity date. For example, a bond maturing in 2030 can be called in 2020. A callable, or redeemable, bond is typically callable slightly above par value; the call value increases the earlier a bond is called. For example, a bond callable at a price of $102 brings the investor $1,020 for each $1,000 in face value, yet stipulations state the price goes down to $101 after a year. Most municipal bonds and some corporate bonds are callable.

Call protection means a set time where the bond cannot be called. The issuer must clarify whether a bond is callable and the exact terms of the call option, including when it can be redeemed and what the price will be when the bond is first sold.

Advantages of Callable Bonds

A callable bond pays an investor a higher coupon than a non-callable bond. The issuer has flexibility in payment amount and loan length when borrowing money from an investor. Issuing a bond lets a corporation borrow at a lower interest rate than a bank loan, saving the company money.

Disadvantages of Callable Bonds

When a company reissues a bond at a lower interest rate, the bond costs the investor more than when it was originally issued. The company can call a bond at a price below the market price. The bondholder must turn in the bond to get back the principal; no further interest is paid. An investor might reinvest at a lower interest rate and lose potential income. The price of a callable bond will not be much higher than its call price, as lowering interest rates mean calling the bond is likely. An investor must consider the yield-to-call (YTC) and yield-to-maturity (YTM) when analyzing potential returns for a callable bond to ensure potential income matches his objectives. A callable bond may not appropriate for an investor seeking regular income and predictable returns.

Types of Call Features

Optional redemption lets an issuer redeem its bonds when it chooses. For example, a municipal bond has call features that may be exercised after a set time period, typically 10 years. Sinking fund redemption requires the issuer to adhere to a set schedule while redeeming a set portion or all of its bonds. Extraordinary redemption lets the issuer call its bonds before maturity if specific events occur, like if the underlying project is damaged or destroyed.

RELATED TERMS
  1. Hard Call Protection

    The period in the life of a callable bond during which the issuing ...
  2. American Callable Bond

    A bond that can be redeemed by the issuer at any time prior to ...
  3. Callable Security

    A security with an embedded call provision that allows the issuer ...
  4. Bond

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

    A financial security that cannot be redeemed early by the issuer. ...
  6. Call Privilege

    The provision in a bond indenture that gives the bond issuer ...
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

    Guide To Embedded Options In Bonds

    Investors should be aware of embedded options that may be available in certain securities as these options may affect the value of the security.
  3. Investing

    Six Biggest Bond Risks

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

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  5. Financial Advisor

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
  6. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  7. Investing

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  8. 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.
RELATED FAQS
  1. 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 >>
  2. Why doesn't the price of a callable bond exceed its call price when interest rates ...

    A callable bond provides the issuer (borrowing entity) with an option to redeem the bond before its original maturity date. ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  2. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  3. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  4. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  5. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center