Bonds & rates
Callable bond
A bond the issuer can repay early, usually when interest rates have fallen.
How it works
The call option belongs to the issuer, so it is exercised when it suits them — refinancing cheaply after rates fall, exactly when you would rather keep the high coupon.
Callable bonds therefore pay a higher yield to compensate, and are quoted on yield to worst rather than yield to maturity.
Where it misleads people
Callable bonds have negative convexity around the call price: they participate fully when rates rise and are capped when rates fall. The asymmetry runs against the holder.
Related terms
- ConvexityHow duration itself changes as yields move — the curvature in a bond’s price-yield relationship.
- Yield to maturityThe total annual return from holding a bond to maturity, counting coupons and any price gain or loss.
- BondA loan you make to a government or company, which pays you interest and returns your money on a set date.
- DurationHow much a bond’s price moves when interest rates change, expressed in years.
More in Bonds & rates
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.