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Callable Bond |
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Callable Bond A bond that may 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 a bit 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, the issuer can call the bond and issue a new bond at a lower interest rate, reducing its 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.
Callable bond. A callable bond can be redeemed by the issuer before it matures if that provision is included in the terms of the bond agreement, or deed of trust. Bonds are typically called when interest rates fall, since issuers can save money by paying off existing debt and offering new bonds at lower rates. If a bond is called, the issuer may pay the bondholder a premium, or an amount above the par value of the bond. Callable Bond What Does Callable Bond Mean? A bond that can be redeemed (called) by the issuer before its maturity; usually a premium is paid to the bond owner when the bond is called. Also referred to as a redeemable bond. Investopedia explains Callable Bond The main reason a bond is called by an issuer is a decline in interest rates. If interest rates have declined since a company first issued its bonds, it probably will want to refinance the debt at a lower rate of interest. In this case, the company will call its current bonds and reissue new bonds at a lower rate of interest. This saves the issuer money by lowering the interest payments on the bonds. Related Terms: Want to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit the webmaster's page for free fun content. |
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