A callable bond, also known as redeemable bond, is a debt security that the issuer may redeem before it reaches the stated maturity date at the issuer’s discretion.
A company may choose to call their bond is the market interest rate are lower, which will allow them to re-borrow at a more beneficial rate. As a result, the investors are typically offered a more attractive interest rate or coupon rate on callable bonds as compared to similar non-callable bonds.
For example, a bond maturing in 2027 can be called in 2022 with a callable price of 103. This means that the investor receives $103 for each $100 invested at the face value.
Advantages and disadvantages of callable bonds –
|Pay a higher coupon or interest rate Investor-financed debt is more flexibility for the issuer Helps companies raise capital Call features allow recall and refinancing of debt||Investors must replace called bonds with lower rate products Investors cannot take advantage when market rates rise Coupon rates are higher raising the costs to the company|