Definition: Callable bonds are bonds that can be called or retired by the issuer at a set price. Callable bonds work almost the same way that callable stocks work. Basically, when a corporation or an issuer issues a bond to fund a new venture, it can put an option on the bond to make it “callable.”
What Does Callable Bond Mean?
This simply means the corporation or issuer has the right to purchase and retire the bonds before the bond’s maturity date.
Corporations and governments often issue bond to fund special projects and expansions. Most public school districts, for example, issue bonds to fund building projects. Some of these corporate and government bonds are callable.
The call price is price paid to retire the bonds and is stated on the bonds themselves when they are issued. You might ask why an issuer would issue bonds and then decide to purchase the bonds back. Most companies issue bonds to pay for an expansion or some other project. When the project is over or the company has earned enough money to retire the bonds, it might decide to do so.
Think about it. If a company issues five-year bonds and retires them in two year, the company will potentially save three years of interest payments on the bonds.