Callable Bonds and Interest Rate Risk

A callable bond, also known as a “redeemable bond”, provides the bond issuer with the right to buy the bond back from the holder before the bond reaches maturity. Usually, the terms of a callable bond includes rules and guidelines regarding the conditions under which the issuer may redeem the bond early. A call date is often specified as the earliest possible date on which the issuer can exercise a call.

The main reason for a call is usually that interest rates have declined since the bond was issued. When rates fall, issuers often call outstanding bonds in order to issue new bonds at a lower interest rate. Therefore, callable bonds create interest rate risk to their holders along with an element of uncertainty regarding the timing of a call.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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