A callable bond is a bond that can be redeemed by the issuer prior to its maturity date. This feature gives the issuer the flexibility to lower its cost of capital if interest rates decline, but it also exposes bondholders to the risk of having their investment called away before they had planned.

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A Callable Bond

Question 8

Multiple Choice

A callable bond:

A) can be paid off early at either the issuer's or the bondholder's request.
B) can be redeemed early if the bondholder so requests.
C) can have its maturity date extended by the issuer.
D) can be redeemed by the issuer prior to maturity.
E) is a bond that pays a variable interest payment.

Correct Answer: