What is a Called Bond?

Called bonds are redeemable or callable bonds that have been declared to be due by the debtor. Since a callable bond is issued with the understanding that the debtor may choose to redeem the bond issue before the date of maturity is reached, investors who choose to purchase callable bonds anticipate that their purchase is very likely to become a called bond.

A called bond is not necessarily a bad deal for the investor. The typical bond issue normally contains specific obligations that the debtor must meet before a called bond can be considered redeemed. The inclusion of this type of detail in the terms and conditions of the original bond issue purchase makes it possible for the investor to understand what type of return he or she can expect in the event that the bond issued is called at some point before full maturity.

Many people who choose to purchase callable bonds consider the transaction not only from the perspective of the anticipated return on the bond reaching maturity. The savvy investor also considers the rate of return in the event that the bond issue is called early. If both rates of return are acceptable to the investor, then an early call on the bond issue does not create any real problems. Thus, a called bond is not usually a disappointment to the investor.

It is not unusual for a debtor to decide that early redemption of a bond issue is a smart move. This often takes place in the event of a change in the interest rate. The debtor will buy back all the bond issues at the original rate of interest, realize the profit associated with the change of the rate, and then release a new callable bond issue that begins the process all over again. This strategy of making money from a called bond is common in the bond market, and has the effect of being good for both the buyer and the seller.