Callable Bond Definition

The pricing of the bond generally depends on the provisions of the bond structure. If you see, the initial call premium is higher at 5% of the face value of a bond, and it gradually reduces to 2% with respect to time. Free Financial Modeling Guide A Complete Guide to Financial Modeling This resource is designed to be the best free guide to financial modeling! The offers that appear in this table are from partnerships from which Investopedia receives compensation. Investopedia does not include all offers available in the marketplace.

Callable Bond Definition

Timothy has helped provide CEOs and CFOs with deep-dive analytics, providing beautiful stories behind the numbers, graphs, and financial models. Day-count basis, specified as the comma-separated pair consisting of ‘Basis’ and a NINST-by-1vector of integers. Coupons per year, specified as the comma-separated pair consisting of ‘Period’ and a NINST-by-1vector. For an American option, use a NINST-by-2 vector of exercise date boundaries. The option can be exercised on any date between or including the pair of dates on that row.

Dictionary Entries Near callable

The company pays its bondholders 6% x $10 million or $600,000 in interest payments annually. Bond market insiders know that one of the most common mistakes that novice investors make is to buy a callable bond on the secondary or over-the-counter market as rates are falling. The experienced investors know the “call date”—the day on which an issuer has the right to call back the bond—is approaching, and are selling to avoid the call. These bonds are referred to as “callable bonds.” They are fairly common in the corporate market and extremely common in the municipal bond market. Callable bond prices fall when interest rates fall, which makes them riskier than other bonds and potentially too complex for new investors. Investors are the lenders, giving money to businesses who promise to make interest payments to the investor.

Cushion Bond Definition – Fixed Income – Investopedia

Cushion Bond Definition – Fixed Income.

Posted: Sun, 26 Mar 2017 03:35:18 GMT [source]

Put OptionPut Option is a financial instrument that gives the buyer the right to sell the option anytime before the date of contract expiration at a pre-specified price called strike price. It protects the underlying asset from any downfall of the underlying asset anticipated. Call PriceA call price is the amount an issuer pays the buyer to buyback, call, or redeem a callable security before it matures. Total ReturnThe term “Total Return” refers to the sum of the difference between the opening and closing value of all the assets over a particular period of time and the returns thereon. To put it simply, the changes in opening and closing values of assets plus the number of returns earned thereof is the Total Return of the entity over a period of time. RefinancingRefinancing is defined as taking a new debt obligation in exchange for an ongoing debt obligation.

Callable bond definition

American OptionAn American option is a type of options contract that can be exercised at any time at the holder’s will of the opportunity before the expiration date. It allows the option holder to reap benefits from the security or stock at any time when the safety or supply is favorable. A European option is the exact opposite of an American option wherein the option holder cannot sell the option until the day of expiration, even when it is favorable. In addition, there is no geographical connection concerning the names since it only refers to the execution of the options trade.

Each element of the cell array is an array containing 1’s where an option is exercised and 0’s where it isn’t. Expected price of the embedded option at time 0, returned as a NINST-by-1 matrix.


Amortizing Prepayment-Linked Securities are index amortizing bonds that are of multi-billion dollar size, and sold via syndicate. A bond that the issuer can demand the investor return before its stated maturity date. 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.

Callable Bond Definition

Company ‘A’ has issued a callable bond on October 1, 2016, with an interest of 10% p.a maturing on September 30, 2021. The bond is callable subject to 30 days’ notice, and the call provision is as follows. ABC Corp. issues bonds with a face value of $100 and a coupon rate of 6.5% while the current interest rate is 4%. Call protection refers to the period Callable Bond Definition when the bond cannot be called. The issuer must clarify whether a bond is callable and the exact terms of the call option, including when the timeframe when the bond can be called. A sinking fund bond is a coupon bond with a sinking fund provision. With these instruments, coupons increase or decrease at specific times during the life of the bond.

Callable Bonds: Don’t Be Surprised When Your Issuer Comes Calling

On the other hand, callable bonds mean higher risk for investors. If the bonds are redeemed, the investors will lose some future interest payments . Due to the riskier nature of the bonds, they tend to come with a premium to compensate investors for the additional risk. Thus, the issuer has an option which it pays for by offering a higher coupon rate. Another way to look at this interplay is that, as interest rates go down, the present values of the bonds go up; therefore, it is advantageous to buy the bonds back at par value. This calling leaves the investor exposed to replacing the investment at a rate that will not return the same level of income. Conversely, when market rates rise, the investor can fall behind when their funds are tied up in a product that pays a lower rate.

Callability allows the bond to be called at the discretion of the issuer within certain limits. When the bond is called, the bondholder receives the par value and does not receive any more coupons.