Callable Bond1 min read

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 –

ProsCons
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 debtInvestors 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