Callability

Callability

Feature of a security that allows the issuer to redeem the security prior to maturity by calling it in, or forcing the holder to sell it back.

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Callability

A provision in an indenture that allows a bond to be redeemed before maturity. Callability allows the bond to be called at the discretion of the issuer, within certain limits. When the bond is called, the bondholder receives the par value (or sometimes slightly more) and does not receive any more coupons. Callable bonds are issued to allow the issuers to hedge against interest rate risk. That is, if interest rates fall significantly, they can call the bond and issue a new bond at a lower interest rate, reducing their liabilities. However, to protect the bondholder, most callable bonds also include call protection, which prevents the bonds from being called for a certain period of time and thereby guarantees the current interest rate for that time.