callable bond

A bond that the issuer can demand the investor return before its stated maturity date. The issuer repays the investor the principal amount. Because the purchaser may lose future interest payments that he or she would have received, if the bond can be called that risk is reflected in the bond’s price. Corporations call bonds when interest rates have fallen below what they are currently paying on the outstanding bonds. The bonds can be called and then reissued at a lower interest rate, which saves the company money. This is a similar process to refinancing mortgages in order to take advantage of lower interest rates.