Callable bond

Definition

Callable bond in plain English

When a company borrows money by selling a bond, it normally has to keep paying interest until the bond's end date ("maturity"). A callable bond gives the company an escape hatch: it can "call" the bond — pay the lenders back early at a pre-agreed "call price" — and walk away from the rest of the payments. Companies love doing this when interest rates drop, the same way you'd refinance a loan to stop overpaying, but it's a mild bummer for lenders who lose that steady income right when good deals are scarce. Because of that risk to lenders, callable bonds usually have to pay a bit more interest to attract buyers.

Learn these first

• Option

Related Principles of Finance terms

• Accrued interest
• Allocation effect
• Basis
• Basis point
• Benchmark
• Bond-equivalent yield (BEY)
• Bootstrapping
• Clean price
• Comparable company analysis (comps)
• Control premium