A callable bond is a bond that the issuer can repay before its scheduled maturity date.
The issuer typically exercises the call when market interest rates have fallen, allowing it to refinance at a lower cost. The bond’s terms specify when it may be called and how much the issuer must pay, often including a call premium above face value during an initial protection period.
Callability benefits the issuer but creates reinvestment risk for the investor. If a high-coupon bond is called, the investor may have to reinvest the returned principal at lower prevailing rates. A callable bond can therefore offer a higher coupon or yield than a comparable non-callable bond. Investors should distinguish a call date from the final maturity date: the call date is an optional early repayment opportunity, while maturity is the date the debt is scheduled to end if it is not called.