PostHeaderIcon Understanding Callable Bonds

The bonds market has been considered as one of those stable of markets out there. While it might not be as exciting as what the stock market offers in terms of rates of return or risk, bonds do provide a certain level of stability and a safety net of sorts for an investor who needs such in his or her investment portfolio. If it is some form of excitement that one looks for in the bond market, then callable bonds may be something that can offer that.

What Are Callable Bonds

Callable bonds are those types of bonds in the market that provides its issuer a certain privilege of redeeming the bond earlier than its expected maturity date. Issuers of callable bonds obtain that right of buying back the bonds it issued on a certain call date and at a defined call price. This may provide a bond issuer with an added level of flexibility in certain instances where recalling the bond issue might be a better option available rather than waiting for the maturity date to pay off the bondholder. The call option that comes with callable bonds may or may not be exercised by the bond issuer.

Callable Bond Pricing

Because of the call option that comes with the callable bonds, they usually are given that level of uncertainty. Unlike a normal fixed bond, callable bonds may or may not be recalled at a certain call date. Bondholders may not be certain if the bond issuer may or may not exercise this option during the lifespan of the bond.

When it comes to pricing, the callable bond usually has a lower price than the normal bond since the call option gives its issuer some added value. And because of the uncertainty that callable bonds come with in terms of whether the call option is exercised or not during the bond’s lifecycle, callable bonds essentially pays a relatively higher yield compared to conventional bonds. Call prices are also set at a price higher than the bond’s original par value.

Callable Bond Investing

The largest market for callable bonds is usually those that are being issued by certain government entities. For those considering investing in callable bonds, they should first have a good idea on how callable bonds work since it may offer some added risk factors. But it can also offer a good investing option for those building up a diversified portfolio of assets and securities. But just like any other investment, the only way to take advantage of its earnings characteristics is by trying to understand how this investment works to one’s full benefit and not just as something to add into a portfolio in order to make it more diverse.


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