Callable Bond
A bond that the issuer can redeem before the maturity date.
What is Callable Bond?
A callable bond gives the issuer the right to redeem (call) the bond before its stated maturity date, typically at a small premium to face value. Issuers exercise this right when interest rates fall, allowing them to refinance at lower rates — analogous to a homeowner refinancing a mortgage. For investors, callable bonds carry reinvestment risk: if called, proceeds must be reinvested at lower prevailing rates. To compensate for this risk, callable bonds offer higher yields than equivalent non-callable bonds. Yield to call (YTC) measures the return assuming the bond is called on the first call date.
Example
A corporation issues 10-year callable bonds at 5% with a call option at year 3. When rates fall to 3% in year 3, the company calls the bonds, repays investors at par, and issues new 10-year bonds at 3%.
Source: CFA Institute — Fixed Income