Callable bond
A bond the issuer may repay before maturity, on stated dates and at a stated price. The option belongs to the issuer, and the coupon is higher than it would otherwise be as payment for it.
Example
A 6% bond maturing in eight years, callable in three years at 102, lets the issuer repay 1,020 per 1,000 of par at that date and end the contract.
Important
The issuer calls when refinancing has become cheaper - which is when you would be reinvesting into those same lower rates. The option is only ever exercised at the holder's expense, so underwrite the bond at its yield to call.
Related terms
- Yield to call — The return implied if a callable bond is repaid at its first call date and call price rather than held to maturity. Quoting the lower of yield to call and yield to maturity is described as the yield to worst.
- Yield to maturity — The single discount rate at which the present value of a bond's remaining cash flows equals its current price. It has no closed-form solution for a multi-period bond and is found numerically.
- Reinvestment risk — The risk that coupons, or the proceeds of a maturing bond, must be put back to work at a lower rate than the one they came from - which is what makes a quoted yield to maturity conditional rather than certain.
- Issuer — The borrower on the other side of a bond - a sovereign government, a state or municipality, a government agency or a company. The issuer owes the coupons and the par value.
Lessons that explain it
All 578 terms in the Investing glossary