Callable bond
A callable bond (also called redeemable bond) is a type of bond (debt security) that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity.[1] In other words, on the call date(s), the issuer has the right, but not the obligation, to buy back the bonds from the bond holders at a defined call price. Technically speaking, the bonds are not really bought and held by the issuer but are instead cancelled immediately.
The call price will usually exceed the par or issue price. In certain cases, mainly in the high-yield debt market, there can be a substantial call premium.
Thus, the issuer has an
With a callable bond, investors have the benefit of a higher
The largest market for callable bonds is that of issues from government sponsored entities. They own many
The price behaviour of a callable bond is the opposite of that of
Pricing
- price of callable bond = price of straight bond – price of call option;
- Price of a callable bond is always lower than the price of a straight bond because the call option adds value to an issuer.[4]
- Yield on a callable bond is higher than the yield on a straight bond.
References
- ^ Callable or Redeemable Bonds
- ^ Advanced Fixed Income: Callable Bonds
- ^ Teaching Note on Convertible Bonds
- ^ "Callable Bonds". Archived from the original on 2008-08-07. Retrieved 2012-10-10.
External links
- Bonds 2000
- Callable Bond: Definition Archived 2011-06-12 at the Wayback Machine