The key difference between callable and non callable bonds lies in the issuer's ability to repay the bond early.
A callable bond allows the issuer to repurchase the bond before its maturity date, typically when interest rates drop, so they can refinance at a lower cost.
A non callable bond prevents the issuer from doing so, ensuring that the bondholder's investment remains intact for the full term.
Callable bonds tend to offer higher yields to compensate for the added risk of early redemption, while non callable bonds provide more predictable returns and lower risk for the investor.
A call option in a bond refers to the issuer’s right to redeem the bond before its maturity date.
This means the issuer can choose to buy back the bond at a set price (typically the face value or slightly above) after a specified call protection period. The purpose of this feature is to allow the issuer to refinance at lower interest rates if the market conditions change in their favor.
For investors, the presence of a call option introduces some risk, as the bond could be redeemed early, typically when interest rates decline, leaving the investor with fewer opportunities to earn the same return.
Callable bonds often offer higher yields to compensate for this potential risk.
For investors, non callable bonds offer the benefit of certainty such as interest payments will continue until maturity without the risk of early redemption.
For issuers, these bonds may come with a slightly higher interest rate, but they also provide stability in long-term financing.
When making investment or financing decisions, it's important to understand how the terms of the bond impact cash flow, risk, and overall strategy.