Callable Bonds
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
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Bonds that may be called for redemption before compulsory maturity as a result of the option exercised by the debtor (issuer), recited in the bond indenture and frequently on the face of the bond certificate.  Bonds are often issued subject to call, i.e., redemption in whole or in part on any interest date, upon proper notice.  Because of the disturbance of the holder’s investment holding of the bonds, the issuer exercising the right of redemption is usually obliged, under a redemption provision, to pay a premium upon redemption, i.e., some specified amount above par.  This payment compensates the investor for the disadvantage of seeking a new investment medium, perhaps on less favourable terms, and for loss of interest in case notice of redemption escapes his or her notice.  Callable bonds are not likely to reach a market price above that at which they are subject to call, unless they enjoy a conversion privilege of conversion into stock, for a buyer at such price above call price of convertible bonds selling above call price as justified by value of the stock into which convertible, the bond, in case of call, could be converted immediately into the stock, within the period of advance notice of the call, usually 30 days.

There are several reasons why an issuer may wish to retain the redemption privilege when issuing its bonds.  It is possible that the issue could be refunded at a lower rate for sinking fund purposes or because of a decline in money rates.  The issuer might also desire to modify its capital structure or finance an expansion, and therefore might wish to consolidate its bond issues.

Callable bonds are also known as optional bonds or redeemable bonds.  

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