Callable bond
A callable bond gives the issuer the right, but not the obligation, to repay the before its stated , at a price specified in advance in the . Most callable bonds include a period early in their life during which they cannot be called, followed by one or more call dates on which the issuer can choose to redeem the .
Issuers add this feature because it gives them flexibility. If interest rates fall after the is issued, the issuer can call the existing and refinance the same amount of debt at the new, lower rate. That flexibility comes at the investor's expense, since being called early cuts short an income stream and typically happens exactly when reinvestment rates have gotten worse, a risk known as .
Because a callable bond is less attractive to investors than an equivalent noncallable , issuers have to pay a higher or sell it at a lower price to compensate for the added uncertainty. A callable bond's return depends heavily on whether it gets called, which is why investors evaluate it using both , the return if the runs its full course, and , the return if it is redeemed at the earliest opportunity.