Callable bond. Get the best rates
Paul Conley Updated January 14, With most mortgages and car loansthere is an option to pay off the loan early. For a borrower, there are some distinct advantages to doing so. For the lender, early payment is less advantageous, and this situation is also true for the bond market. Hearing the Call When you buy a bond, you lock up your money in exchange for a particular rate of return.
What Is a Callable Bond? - TheStreet Definition
You are essentially lending money to the seller. For example, if you buy a low risk, year, Callable bond corporate bond that pays a yearly amount, or coupon rate, of 4 percent, you expect to collect an annual return of 4 percent for the next 15 years in exchange for your investment.
In most cases, the corporation that sold the bond has agreed to pay you a coupon rate of 4 percent for the next 15 years. The Risks of a Callable Bond Buying a callable bond may not appear any riskier than buying any other bond.
RSS Feed for Callable Bond Definition A bond is callable when the issuer has the right to return the investor's principal and cease all interest payments before the bond matures. For example, a bond that matures in might become callable in Issuers must clearly specify whether their bonds are callable, and the precise terms of the call option, when the bonds are first offered for sale. Typically, a bond that is callable will become callable at a premium. After a year, the call price might decline to
But there are reasons to be cautious. That can be a disaster for an investor who achieved a level of safety by locking into a desirable interest rate.
The issuer of your bond may decide to pay off the old bonds issued at 4 percent and reissue them at 2 percent. Should You Buy a Callable Bond?
Buying any investment requires that you weigh the potential return against potential risk. For entry-level investorscallable bonds may be too complex to consider.
For example, the prices of callable bonds in the secondary market move quite differently from the prices of other bonds. Consider Interest Rates If you are considering a callable bond, the biggest factor is interest rates.
What do you expect to happen to interest rates between now and the call date? If you think rates will rise or hold steady, you do not have to worry about the bond being called.
However, if you think rates may fall, you should be paid for the additional risk in a callable bond. Therefore, shop around. Callable bonds pay a slightly higher interest rate to compensate for callable bond additional risk.
Make sure that the bond you buy offers enough reward to cover the additional risk.