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What is a callable bond?
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. Return to Questions
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