Callable bond
Okay kiddo, imagine a callable bond is like a special type of toy that your friend borrowed from you.
So you lend your toy to your friend, but your friend has the power to return it to you at any time they want. This means that even though you might have wanted to keep playing with the toy for a while, your friend could say “okay I’m done with it now” and give it back to you early.
In the same way, when a company issues a callable bond, they are borrowing money from people like you and me. But, unlike a regular bond which has a fixed term, a callable bond means that the company can choose to pay back the money earlier than they promised if they want to.
For example, if you bought a 10-year callable bond worth $1000 from a company, it means that the company has the right to repay your $1000 before the 10 years are up. They might do this if interest rates go down, because they can then borrow money at a lower rate and pay back your bond early.
This is good for the company because they can save money on interest payments, but it’s not always good for you as the investor. If the company does repay your bond early, you might miss out on future interest payments that you were counting on.
So, just like when your friend borrows your toy, owning a callable bond means that you don’t have complete control over when you get your money back.
So you lend your toy to your friend, but your friend has the power to return it to you at any time they want. This means that even though you might have wanted to keep playing with the toy for a while, your friend could say “okay I’m done with it now” and give it back to you early.
In the same way, when a company issues a callable bond, they are borrowing money from people like you and me. But, unlike a regular bond which has a fixed term, a callable bond means that the company can choose to pay back the money earlier than they promised if they want to.
For example, if you bought a 10-year callable bond worth $1000 from a company, it means that the company has the right to repay your $1000 before the 10 years are up. They might do this if interest rates go down, because they can then borrow money at a lower rate and pay back your bond early.
This is good for the company because they can save money on interest payments, but it’s not always good for you as the investor. If the company does repay your bond early, you might miss out on future interest payments that you were counting on.
So, just like when your friend borrows your toy, owning a callable bond means that you don’t have complete control over when you get your money back.