Callable Bond

Callable Bond is a type of the bond that gives the issuer the right, at its discretion, to redeem the obligation ahead of schedule before the end of its circulation period. The recall of bonds can be carried out either on certain dates set in advance by the issuer - in this case, we are talking about bonds with an embedded call of the European type, or within a certain period of time - in this case, it is a callable bond with an embedded call of the American type. If there is an American-call, the terms of the issue stipulate the period during which the issuer cannot resort to early redemption (so-called lock-up period).

The advantage of callable bonds for the issuer is the flexibility in defining the borrowing policy. The advantages for the borrower are both the ability to refinance their debt in the event of a decrease in interest rates on the market, and the ability to adjust the capital structure while the economic situation remains unchanged, which may be due to a change in the legal requirements for capital adequacy, for example. Callable bonds usually pay a higher coupon to offset the risk of early redemption. In addition, often in the event of early redemption, the holder receives not only the nominal value and the accumulated yield accrued before the date of withdrawal, but also a certain premium (most often 1-3% of the nominal value). For callable bonds with several embedded American calls this premium decreases as the maturity approaches. Discounted callable bonds with several embedded European calls increase the size of this premium.

Perpetual bonds and fixed-to-float bonds are almost always callable bonds.