What is a Callable Bond?
A callable bond is a type of bond issue that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches the date of maturity. Generally, the terms of the callable bond will include guidelines of what types of conditions must exist before the callable bond is considered eligible for early redemption. The terms and conditions also often specify a call date that is considered to be the earliest possible date that the bond issuer can actually exercise the demand for payment prior to the bond maturity. Sometimes referred to as redeemable bonds, callable bonds tend to include provisions that ensure the investor that in the event of a call date being exercised, the investor will receive all interest due up to the date that is issued for the call. Along with honoring the rate of interest guaranteed for the duration for the bond, the issuer usually also honors a rate that is slightly above the par and applies it to the interest due. This us
A callable bond is a bond that can be retired, or “called in,” by the issuer before the bond matures. This gives a company the ability to respond to falling interest rates. Say a company issues bonds with a 12% coupon, and, a few years later, bond yields drop to 4%. If company can call the original bonds, issue new bonds at 4% and pay off the original bond investors, they can save millions in interest charges. However, if you buy the bond at the higher rate, after the bond is called, you find yourself having to reinvest at the lower rate. Callable bonds often pay higher rates than noncallable bonds — which is some compensation.
