Callable or Redeemable Bonds
When the issuer has the right or obligation to redeem all or a portion of a bond issue prior to the bond’s maturity date, it is known as a callable bond, or redeemable bond. An optional redemption allows the issuer to redeem the bonds early, at its option, often at a premium. This callable right may only be exercised at specified times, usually after a certain period of years has elapsed. Issuers will generally choose to redeem a callable bond when interest rates for similar bonds fall below a bond’s coupon rate. Like refinancing the mortgage on your house, the issuer can save money by paying off the bond and issuing another bond at a lower interest rate.
With a mandatory redemption, a bond issuer is required to redeem an entire issue or a portion of its outstanding issues prior to maturity. Some types of mandatory redemptions occur on a pre-determined basis. Bonds are redeemed at a specified price, often at par, plus interest accrued prior to