Callable Bonds

Today’s markets are extremely volatile and there are substantial amounts of risks in certain areas. Bonds are used for investors to plan for their future for a number of reasons. Of these reasons, retirement and education are the most common. There are many different bonds that investors can take part in but they all have minor differences to be aware of. Callable bonds are bonds that are also called redeemable bonds. These bonds are different from other types of bonds on the market. Traditional bonds accrue interest over a set period of time. At the end of the contract the principle is paid back in full. Callable bonds are not binding to set term limits and may be called back before their full maturity.

The issuer has the option to call back callable bonds at any time. They are not obligated to do so but in certain cases they may want to call back a bond for different reasons. Callable bonds are not held by the issuer. They are called back and can be cancelled immediately. The call back price normally will be more than the issued price of the bond. Markets that are in high-yield debt periods will produce a high call back premium that is appealing to the investor. Early call backs doesn’t mean that the investor will lose any money. They may miss out on future interest payments but they will see a return in the principal amount that was loaned out.

Investors who buy callable bonds will see higher rates on the coupon. This is a set amount and can pay higher than traditional non-call back bonds. Callable bonds allow the issuer of the bonds to take advantage of lower interest rates on the market. Once the market produces lower interest rates for callable bonds, the issuer of the bonds will call back the bonds in order to refinance them at lower interest rates. The investor will receive a higher amount than they initially invested while the issuer of the bonds are able to resale their callable bonds at lower paying interest rates. Government institutions and other government sponsored firms are the largest callable bond issuers. Callable bonds promote stability within the markets by allowing issuers to adjust interest rates with their bonds. The investor who buys callable bonds will earn a significant amount of profit even though there is a chance of the bonds being called back before the full maturity date. Investors can navigate through the markets to find higher paying interest bonds. If they receive a call back they can then invest in other callable bonds that are paying higher interest rates.

The complexity of the markets can be easily predicted by watching callable bonds. Once interest rates drop an experienced investor will seize the opportunity by investing in new callable bonds. Over time the callable bonds will pay the investor interest payments until the bonds have either matured or called back. Normal traditional bonds are set at specific time periods according to their contracts. A 30 year bond will last 30 years regardless of any fluctuation of interest rates. Interest rates may go up during those 30 years but the investor will not have the same opportunities as someone who invested in callable bonds.

Government issued bonds such as callable bonds are a win-win situation. The issuer of the bonds not only can make adjustments for changes in the markets, the investor is also free to invest in other bonds once their callable bonds are called in. Investors who are not looking for new opportunities or don’t want to deal with the changes in the market, are recommended to invest in traditional bonds.

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