Callable Bond

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Callable Bond

A bond is callable when the borrower has the right to pay it back early.

Let’s say a company issues a 30 year bond to investors at 12%. Ten years pass and the interest rate has gone down to 6%. If the bond is callable, the company can borrow money from the bank at 6% and pay back the investors. The investors won’t like that. They WERE making 12% on their money and now if they go to reinvest it they can only get 6%. But the company loves it because they have cut their interest expense by half.

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