Callable Bond
Candlefocus EditorThe issuer has the ability to “call” the bond, which means that the debt will be paid off at a predetermined call price. This allowance is often beneficial for companies that need to pay off or refinance their debt, allowing them to take advantage of lower interest rates on new debt. Depending on the terms of the callable bond, the issuer may also be able to pay off the bond at a predetermined rate of interest over the remaining term of the bond, in which case the issuer would benefit from any changes in market interest rates.
In order to attract interested investors, callable bonds generally carry a higher coupon rate than non-callable bonds of similar maturity and credit quality. This premium compensates the investor for the lost opportunity of receiving interest over the remaining term, as well as the possibility of not being able to receive the full face value of the bond due to the callability.
Callable bonds, however, can be risky investments, as the issuer can pay off the bond before its maturity date, resulting in an investor not receiving the full returns they might have expected. Furthermore, there is a risk that the issuer will default on the bond, preventing investors from receiving their principal and any remaining interest. Before deciding to invest in a callable bond, investors should carefully research the terms and conditions, including any early redemption rules. Additionally, due to their higher rate of return and some of the associated risks, sophisticated knowledge and experience may be necessary to successfully invest in callable bonds.