What are Callable Bonds?
When selecting bonds, it is important to know if a bond is callable. If it is callable – and many bonds are – the issuer has the right to redeem the bond before its maturity date.
A callable bond is a bond that can be redeemed by the issuer at a specified price and time that is earlier than the scheduled maturity date. One reason why corporations, municipalities, and federal agencies issue callable bonds is so if interest rates decline, they can buy back their bonds early and issue new bonds that pay a lower rate of interest. While this can be advantageous for the bond issuers, it poses a reinvestment risk for the bondholders who may have to reinvest their proceeds in a lower rate environment.
To help compensate investors for the additional risk, callable bonds often offer higher yields than comparable non-callable bonds. And some callable bonds may pay investors more than the bond’s face value if redeemed early. A call price that is greater than the bond’s face value is said to include a call premium.
A callable bond may also offer some call protection – that is a period of time after the bond is issued when it cannot be called. For example, a ten-year bond may specify that it is not callable during the first five years. This means that investors can generally count on receiving interest payments from this bond for at least the first five years after it is issued.
When the call period begins, the issuer has the right to redeem the bonds on specified call dates, or if the bonds are continuously callable, at any time during the call period.
If your bond is redeemed before maturity, the issuer will pay you the specified call price, which is generally the bond’s face value or the face value plus a premium and any interest that has accrued up to that point.
To get an idea of the return you might expect from a callable bond, take a look at its yield to call, in addition to its yield to maturity. The yield to call is the rate of return you can expect if the bond is called at its next call date. The yield to maturity is the rate of return you can expect if the bond is not called and you hold it until maturity.
There is a lot to consider when investing callable bonds. At Copper Leaf Financial, we work with you over the long term. We develop a plan that acts as a road map - and evolves over time. It reflects changes in your life and your goals. We can alleviate that sinking and overwhelming feeling that keeps you up at night trying to decide where and how to invest for your future. A proper plan enables you to invest the same way we do: broad diversification, low costs and appropriate levels of risk. We prize evidence over emotion and we value academic and market research over fluctuating opinions. With offices in Rutland and Williston Vermont, you can contact our office at 802.878.2731 for more information.