Callable bonds give the option to the issuing firm and hence reduce the value of the bond.

Question

Quizplus · Accepted Answer

Callable bonds give the option to the issuing firm to buy back the bonds before their maturity date. This reduces the value of the bond for investors because they may not receive the full expected stream of interest payments. Therefore, callable bonds are typically issued with a higher yield (i.e., coupon rate) to compensate investors for the risk of the bond being called.

Callable Bonds Give the Option to the Issuing Firm and Hence