What Are Callable Bonds?

What are Callable Bonds? In bond investments, a callable bond is a type of bond which can be called in prior to the bond maturity date. Frequently referred to as redeemable bonds in the marketplace, these callable bonds allow bond issuers the ability to capitalize on falling bond and lending interest rates. For example if a callable bond is issued by the government or other government sponsored bond entity for an interest rate (coupon rate) of 6% for the bond life of 10 years, and during this time interest rates in the market fall to say 4%, the bond issuer can issue a bond call. The bond call would effectively cancel the redeemable bond effective immediately. The bond would be paid out to the bond holder usually just somewhat above par value. In this way a callable bond can be a very effective tool for a bond issuer to use both to raise capital, but also keep their bonds-essentially borrowed money- at the best interest rates the market has to offer. Callable bonds have been called back in record numbers from many government sponsored bond issuers such as those selling mortgage backed securities. As interest rates fall for mortgage loans, bond issuers are quick to cancel and call previous bonds and begin issuing new ones at lower interest rates.

Callable Bonds: The Investor’s Advantage

So far redeemable bonds seem to be a major advantage to the issuing entity, which is true, but there exist benefits to the investor as well. For instance callable bonds are issued at better interest rates than regular bonds of which a bond call cannot be instituted. In addition to higher interest rates paid out, the investor who receives a bond call on their callable bonds can also benefit from sometimes significantly high payouts from the cancellation. This amount, always over par, can be very profitable especially if the bond has little time into its bond life.

What Are Callable Bonds?

Callable Bonds: The Investor’s Advantage

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