Callable bond

A callable bond is a bond that can be redeemed by its issuer before the maturity date. The issuer will usually only redeem a bond when interest rates fall, so that it can issue replacement bonds at a lower interest rate, thereby reducing its interest expense.

The call feature is typically not activated until a certain period of time has passed (such as 10 years), so that investors are assured of the interest rate stated on the bond for a fairly long period of time.  This delay is known as call protection. If a bond is redeemed, its holder is usually paid the par value of the bond, as well as a call premium to compensate them somewhat for the lost interest rate. The call premium may be higher if a bond is redeemed quite early, and declines if the redemption occurs later.

Investors usually demand a somewhat higher interest rate when a bond has a call feature, since a bond redemption will deprive them of an interest rate that is higher than the market rate.

Similar Terms

A callable bond is also known as a redeemable bond.