Callable Bonds

Callable bonds give the issuer the right to redeem the bond before maturity, providing protection against

a decline in interest rates. Therefore, the issuer of a callable bond has the right to replace an old,

expensive bond. From the investor’s perspective, however, there is a higher level of reinvestment risk.

Callable bonds usually offer a higher yield.

A call premium is paid over and above par if the bond is called. The call protection period prohibits

calling a bond early and is an incentive for the investor to buy it. Make-whole calls make a payment

based on the present value of the future coupon and principal at an early date. The redemption value is

significantly greater than the current market price. American-style calls or continuously callable bonds

provide the right to call a bond at any time. European-style calls give the right to call only once at the call

date. Bermuda-style calls give the right to call on specified dates after the call protection period.

Callable Bonds - Lecture notes Sales summary by product line

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