Callable Bonds: Understanding How They Work

Callable bonds make up a large share of the bond market—and introduce one more variable into the bond-investing process.

Callable bonds are a type of bond that can be redeemed by the issuer before the stated maturity date. There are different types of callable bonds, and different reasons why a bond might be "called" early by the issuer. It's important to understand the basics of callable bonds so you're not caught off guard if your bond investment is returned to you before the stated maturity date.

Traditional calls vs. make-whole calls

The two most common call features are traditional calls and make-whole calls.

Traditional calls:

There are three characteristics that investors should be aware of when considering bonds with traditional call features: