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Information > Financial Terms > This page Callable Bonds Bonds
that may be called for redemption before compulsory maturity as a result
of the option exercised by the debtor (issuer), recited in the bond indenture
and frequently on the face of the bond certificate.
Bonds are often issued subject to call, i.e., redemption in whole
or in part on any interest date, upon proper notice.
Because of the disturbance of the holder's investment holding of
the bonds, the issuer exercising the right of redemption is usually obliged,
under a redemption provision, to pay a premium upon redemption, i.e.,
some specified amount above par.
This payment compensates the investor for the disadvantage of seeking
a new investment medium, perhaps on less favourable terms, and for loss
of interest in case notice of redemption escapes his or her notice.
Callable bonds are not likely to reach a market price above that
at which they are subject to call, unless they enjoy a conversion privilege
of conversion into stock, for a buyer at such price above call price of
convertible bonds selling above call price as justified by value of the
stock into which convertible, the bond, in case of call, could be converted
immediately into the stock, within the period of advance notice of the
call, usually 30 days. There
are several reasons why an issuer may wish to retain the redemption privilege
when issuing its bonds. It
is possible that the issue could be refunded at a lower rate for sinking
fund purposes or because of a decline in money rates.
The issuer might also desire to modify its capital structure or
finance an expansion, and therefore might wish to consolidate its bond
issues. Callable
bonds are also known as optional bonds or redeemable bonds. |