Callable bond

Definition

A callable bond is a type of bond that can be redeemed by the issuer before its maturity date at a specified call price. This feature gives the issuer the flexibility to refinance debt if interest rates decline.

5 Must Know Facts For Your Next Test

1. Callable bonds typically offer higher interest rates than non-callable bonds to compensate investors for the call risk.
2. The issuer may call the bond if market interest rates fall, allowing them to reissue debt at lower rates.
3. The call premium is an extra amount above the face value that issuers pay when calling a bond early.
4. Callable bonds often have a 'call protection' period during which they cannot be called by the issuer.
5. Investors face reinvestment risk with callable bonds since they might have to reinvest funds at lower interest rates if the bond is called.

Review Questions

• What advantage does a callable bond offer to an issuer?
• Why do callable bonds typically offer higher interest rates compared to non-callable bonds?
• What is reinvestment risk in the context of callable bonds?

Related terms

YieldToCall: The rate of return anticipated on a bond if it is called before its maturity date.

CallProtectionPeriod: A period during which a callable bond cannot be redeemed by the issuer.

ReinvestmentRisk: The risk that an investor will have to reinvest proceeds at a lower interest rate if their bond is called early.