Callable Bonds – What is the definition? – Finance Dictionary

www.subjectmoney.com http Callable Bonds – A callable bond is a bond with a call provision. A call provision gives the issuer of a bond the option to repurchase the bond before its maturity. Bond issuers will usually call bonds should interest rates sufficiently decline. Bonds with call provisions usually require a call premium and higher interest (coupon) rates. If a firm issues bonds while interest rates are high then they will have to pay high coupon rates. If interest rates drop then the company might want to repurchase the high interest bonds and issue new bonds with lower interest rates. Deferred Callable Bond – A deferred callable bond is a callable bond that also has a period of protection which is a period of time when the bond cannot be repurchased. Yield to Call For callable bonds investors are interested in the yield to call. This is because if interest rates fall below the coupon rate of the bond then the firm is likely to repurchase the bond and issue new bonds at lower interest rates. Callable bonds have a protection period where they cannot be repurchased however there is also sometimes an implicit form of call protection for bonds that are selling at deep discounts below their call price. If this is the case then even if interest rates drop a firm might not call the bonds because their call price is more than the bond’s market value therefore it would not be financially beneficial to the firm. Bonds that are selling at a premium compared to their call …