Understanding Bonds - Question 98

What is a callable bond?

When interest rates drop, an issuer (such as a corporation or municipality) may wish to redeem its outstanding bonds and refinance them at a lower rate. It's similar to an individual refinancing a home mortgage when interest rates drop considerably since the date the mortgage was issued. Bonds with call provisions protect investors from having their bonds called or redeemed before a specified date (such as 5 or 10 year call protection).