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Finance Dictionary and Glossary of Investment Terms
Callable Bond
Definition 1.
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called. Also known as a redeemable bond.
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Definition 2.
A bond which the issuer has the right to redeem prior to its maturity date, under certain conditions. When issued, the bond will explain when it can be redeemed and what the price will be. In most cases, the price will be slightly above the par value for the bond and will increase the earlier the bond is called. A company will often call a bond if it is paying a higher coupon than the current market interest rates. Basically, the company can reissue the same bonds at a lower interest rate, saving them some amount on all the coupon payments; this process is called "refunding." Unfortunately, these are also the same circumstances in which the bonds have the highest price; interest rates have decreased since the bonds were issued, increasing the price. In many cases, the company will have the right to call the bonds at a lower price than the market price. If a bond is called, the bondholder will be notified by mail and have no choice in the matter. The bond will stop paying interest shortly after the bond is called, so there is no reason to hold on to it. Companies also typically advertise in major financial publications to notify bondholders. Generally, callable bonds will carry something called call protection. This means that there is some period of time during which the bond cannot be called. also called redeemable bond. opposite of irredeemable bond or non-callable bond.
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Definition 3.
A bond that can be retired, or ""called in,"" by the issuer before the bond matures. The power to call a bond gives companies a way to respond to falling interest rates.Say XYZ Corp. issued bonds with a 12 percent coupon several years ago, when interest rates were high. If bond rates had since dropped to 7 percent, XYZ Corp. could call the bonds, pay off the investors and issue new bonds at just 7 percent -- saving millions in interest charges. The investors would come out on the short end, because they would have to re-invest the cash at much lower rates.Callable bonds often pay higher rates than noncallable bonds to compensate investors for this uncertainty. If you decide to buy callable bonds, just remember that the bond might be called back if interest rates drop.
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