The downward pressure on a
callable bond's price appreciation during a period of declining
interest rates. Declining interest rates normally raise a bond's
price because interest rates are usually fixed at issue; buying such a bond will entitle the
buyer to a higher interest rate than he/she would otherwise be able to receive when rates are declining. Callable bonds also rise in price, but price compression means that they do not rise as much because of the
risk that the
issuer will call the bond and simply
repay the
principal, depriving the
bondholder of future interest.