What are callable bonds?

Callable bonds refer to a specific type of bond that grants the issuer the right to redeem or "call" the bond before its scheduled maturity date. This ability allows issuers to refinance their debt if interest rates fall or if they want to manage their financing costs more effectively. When interest rates decline, issuers may opt to call their bonds and reissue new ones at a lower rate, thereby reducing their interest expenses.

Investors should be aware of the call feature, as it can affect the bond's yield and overall investment strategy. For example, if a callable bond is redeemed early, investors may not receive the full interest payments they anticipated, particularly if they have invested at higher interest rates. Thus, understanding how callable bonds operate is crucial for both issuers and investors in the bond market.