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Callable Bond

In a bond, an organization takes a debt from an investor (who becomes bond holder) and pays back the money after a maturity date. Essentially, the organization adds on money in the form of interest on top of its initial value. On the maturity date, the holder of the bond will receive its matured value (initial value + interest). In a callable bond, however, the organization who issued the bond reserves the right to boy back their bonds at a time outside that single maturity date. If the organization chooses to do this, the date they buy back the bond is called the call date, and the price paid the call price. The call price comes at an advantage to both parties - the issuer of the bond can refinance at lower market rates, and the bond holder gets a higher coupon from the deal. In the long term, however, the holder of callable bond must consider that any new investments will be done at that lower rate.

Fast Facts

  • the price of a callable bond will be less than that of a straight bond
  • callable bonds are common in mortgage backed security

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