Callable Bonds
What Is a Callable Bond?
A callable bond is a type of bond that allows the issuer to repay the bond before its maturity date. This early repayment option, known as a call provision, gives the issuer the right to redeem the bond if certain conditions are met.
Callable bonds are commonly issued by corporations, municipalities, and government entities.
Why It Matters
Callable bonds introduce call risk for investors. If interest rates decline, issuers may call the bond early and refinance their debt at lower rates. This means investors may lose the opportunity to continue earning the original higher interest payments.
Because of this additional risk, callable bonds often offer higher interest rates than non-callable bonds.
How Callable Bonds Work
Callable bonds include specific terms outlining:
- the date when the bond can first be called
- the call price paid to investors
- any call protection period
If interest rates fall, issuers may exercise the call option and repay the bond early.
Callable Bond vs Puttable Bond
- Callable bonds give the issuer the right to redeem the bond early.
- Puttable bonds give the investor the right to sell the bond back to the issuer.
FAQs About Callable Bonds
Why do issuers call bonds early?
Typically to refinance debt at lower interest rates.
Do callable bonds pay higher interest?
Yes, they often provide higher yields to compensate investors for call risk.
What is call protection?
A period during which the bond cannot be called by the issuer.
Related Terms
