Callable Bond.

In plain English

A callable bond is a bond that gives the issuer the right to repay it before the maturity date, on set dates and at a set price. Issuers usually do this when interest rates have fallen, so they can pay off the old higher-rate bond and reissue new debt at a cheaper rate. For you, the lender, that means your steady interest payments can stop right when reinvesting that money would earn you less. To compensate for this disadvantage, callable bonds typically pay a slightly higher interest rate than comparable non-callable bonds.

01Why it matters

A call can cut your income short at the worst possible time, leaving you to reinvest at lower rates, so it matters to know whether a bond can be called before you count on its payments lasting to maturity.

02The math, step by step

Imagine you own a callable bond paying 6 percent that matures in 2035 but can be called starting in 2028. If rates fall to 4 percent by 2028, the issuer will likely call the bond, hand back your principal, and stop the 6 percent payments. You now have to reinvest that money in a 4 percent world. The slightly higher rate you got upfront was the trade-off for accepting that early-repayment risk.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.