CALLABILITY

Callability is a bond issuer's privilege of redeeming its bonds early, before they are ready to mature.

Corporations often call their bonds when interest rates are falling. When interest rates fall, they may want to replace any high-yielding bonds with newer, lower-yielding bonds.

A callable bond specifies the call price of the bond.

The call price is the price the issuer will pay if the bond is called.

Callability has some advantages for investors. The call price is always greater than the bond's face value because the issuing corporation adds a premium to it. Thus, the investor can profit from the early redemption.