Question

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as: Callable bonds.

Answer 1

Callable bonds are those that feature an option that can be exercised by the issuer to retire them at a certain dollar amount before maturity.

What aspect of a bond has a callable feature?

Bonds that the issuer may call or redeem earlier than the bonds' maturity date are known as callable or redeemable bonds. When an issuer calls its bonds, it pays investors the call price—typically the face value of the bonds—along with any interest that has already accumulated, and then stops paying interest.

When should the call option on a bond be used?

When rates are lowering, the corporation that issues callable bonds can use the call option to call the bond, pay off the obligation, and refinance it at a reduced rate. The business can save on interest expenses in this situation.

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