BROWSE

Callable Bond

Definition

A callable bond is a type of bond that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity. In other words, on the call date, the issuer has the right, but not the obligation, to buy back the bonds from the bond holders at a defined call price. Technically speaking, the bonds are not really bought and held by the issuer but are instead cancelled immediately.

What is a 'Callable Bond'

A callable bond is a bond that can be redeemed by the issuer prior to its maturity. If interest rates have declined since the company first issued the bond, the company is likely to want to refinance this debt at a lower rate of interest. In this case, the company calls its current bonds and reissues them at a lower rate of interest.

Explaining 'Callable Bond'

A callable bond means the issuer can return the investor's principal and stop interest payments before the bond's maturity date. For example, a bond maturing in 2030 can be called in 2020. A callable, or redeemable, bond is typically callable slightly above par value; the call value increases the earlier a bond is called. For example, a bond callable at a price of $102 brings the investor $1,020 for each $1,000 in face value, yet stipulations state the price goes down to $101 after a year. Most municipal bonds and some corporate bonds are callable.

Advantages of Callable Bonds

A callable bond pays an investor a higher coupon than a non-callable bond. The issuer has flexibility in payment amount and loan length when borrowing money from an investor. Issuing a bond lets a corporation borrow at a lower interest rate than a bank loan, saving the company money.

Disadvantages of Callable Bonds

When a company reissues a bond at a lower interest rate, the bond costs the investor more than when it was originally issued. The company can call a bond at a price below the market price. The bondholder must turn in the bond to get back the principal; no further interest is paid. An investor might reinvest at a lower interest rate and lose potential income. The price of a callable bond will not be much higher than its call price, as lowering interest rates mean calling the bond is likely. An investor must consider the yield-to-call (YTC) and yield-to-maturity (YTM) when analyzing potential returns for a callable bond to ensure potential income matches his objectives. A callable bond may not appropriate for an investor seeking regular income and predictable returns.

Types of Call Features

Optional redemption lets an issuer redeem its bonds when it chooses. For example, a municipal bond has call features that may be exercised after a set time period, typically 10 years. Sinking fund redemption requires the issuer to adhere to a set schedule while redeeming a set portion or all of its bonds. Extraordinary redemption lets the issuer call its bonds before maturity if specific events occur, like if the underlying project is damaged or destroyed.


Further Reading


Evaluation of callable bonds: Finite difference methods, stability and accuracy
academic.oup.com [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …

Are negative option prices possible? The callable US Treasury-Bond puzzleAre negative option prices possible? The callable US Treasury-Bond puzzle
www.jstor.org [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …

Why firms issue callable bonds: Hedging investment uncertaintyWhy firms issue callable bonds: Hedging investment uncertainty
www.sciencedirect.com [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …

Reduced-form valuation of callable corporate bonds: Theory and evidenceReduced-form valuation of callable corporate bonds: Theory and evidence
www.sciencedirect.com [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …

A reexamination of option values implicit in callable Treasury bondsA reexamination of option values implicit in callable Treasury bonds
www.sciencedirect.com [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …

A model for designing callable bonds and its solution using tabu searchA model for designing callable bonds and its solution using tabu search
www.sciencedirect.com [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …

The mispricing of callable US Treasury bonds: A closer lookThe mispricing of callable US Treasury bonds: A closer look
search.proquest.com [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …

Using duration and convexity in the analysis of callable convertible bondsUsing duration and convexity in the analysis of callable convertible bonds
www.tandfonline.com [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …

Shareholder gains from callable‐bond refundingsShareholder gains from callable‐bond refundings
onlinelibrary.wiley.com [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …

The effect of bond refunding on shareholder wealthThe effect of bond refunding on shareholder wealth
www.jstor.org [PDF]
… of Exeter), Jorg Waldvogel (ETH), two anonymous referees, and the session participants of the Royal Economic Society Conference … [MARCH I995] CALLABLE BONDS … The purpose of this paper is to evaluate numerically the semi-American callable bond by means of four finite …


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