Why callable bonds

It has a maturity date, just like any other bond. However, the callable feature means that the issuer can notify investors that it plans to redeem the bond at some point prior to its maturity-at-par date. This can be risky for the investor looking for steady income. In fact, the issuer makes it crystal clear at the time the bond is issued that it retains the right to call in the bond early.

This is also known as the redemption feature. For example, the issuer might say it reserves the right to call the bond every five years. And the issuer would give appropriate notice that it intends to exercise that feature.

The company may decide that it is advantageous to call that particular bond in, cancel it, and issue another bond at, say, four per cent if it is convinced interest rates are going to fall.

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