A bond whose issuer has the right, under certain conditions, to redeem (buy back) the bond before its maturity date.
Also known as a redeemable bond. One condition of the issuer's ability to redeem the bond early is a designated initial time period during which the bond cannot be called (known as call protection). Another is the price at which the bond may be redeemed. Usually it is slightly above par value for the bond and is higher the earlier the bond is called, so that the issuer pays a premium for calling the bond early. When a company calls a bond, the bondholder is notified and then has to return the bond. Shortly after the bond is called it will stop paying interest, leaving no reason for the bondholder to hold onto it anyway.
A company will typically call a bond if interest rates have fallen, in order to refinance its debt to save money on coupon payments (a process known as "refunding"). A problem with this is that the decrease in interest rates from the time bond was issued causes the price of the bond to increase. Often companies also have the right to call bonds at a lower price than the market level. The investor benefits from a higher coupon than bullet (non-callable) bonds have, making this an attractive investment option despite the downside of the potential for the call option to be exercised.
Related Words
