Callable Bond Definition, How It Works, and How to Value

Each element of the cell array is an array containing 1’s where an option is exercised and 0’s where it isn’t. Maturity date, specified as an NINST-by-1 vector using a datetime array, string array, or date character vectors. Each element of the cell array is an array containing 1’s where an option is exercised and 0’s where it is not. U.S. Legal Tender means such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts.

Callable Bond – A bond which permits or requires the issuer to redeem the obligation before the stated maturity date at a specified price, the call price, usually at or above par value. Callable Bond – A bond issue in which all or part of its outstanding principal amount may be redeemed before maturity by the issuer under specified conditions. Callable Bond — A bond issue in which all or part of its outstanding principal amount may be redeemed before maturity by the issuer under specified conditions. By studying the market, investors can predict the time a bond will be called. If the bond’s trading price is higher than what they paid, they can sell it and make a profit before it is called. However, callable bonds provide a higher yield than non-callable bonds.

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Technically speaking, the bonds are not really bought and held by the issuer but are instead cancelled immediately. Words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders. All references to applicable provisions of Law shall be deemed to include callable bonds definition any and all amendments thereto. Separately, the financial crisis hurt the credit ratings of a number of U.S. companies. A lower credit rating generally translates into high interest rates, since a worse rating implies that investing in that company carries a higher degree of risk than it did previously.

If interest rates in the market have gone down by the time of the call date, the issuer will be able to refinance its debt at a cheaper level and so will be incentivized to call the bonds it originally issued. Another way to look at this interplay is that, as interest rates go down, the present values of the bonds go up; therefore, it is advantageous to buy the bonds back at par value. Bonds are typically called when interest rates fall, since issuers can save money by paying off existing debt and offering new bonds at lower rates.

Callable or Redeemable Bonds

American option — NINST-by-1 vector of strike price values for each option. The Settle date for every bond is set to the ValuationDate of the HW tree. Bank Bonds means any Bonds purchased with moneys received under the Letter of Credit in connection with a Liquidity Drawing and held by the Tender Agent, or its agent, in each case, for the account of the Issuing Bank. Extraordinary Redemption gives the issuer the right to call the bond when an unusual event has caused damage to the issuer’s source of revenue.

• Similar issues arise for callable bonds in the municipal, corporate, and government agency sectors.
• The earlier in a bond’s life span that it is called, the higher its call value will be.
• Callable bonds give issuers—such as corporate and municipal entities —the option to effectively refinance their debt later at a better interest rate, much like you might refinance your mortgage.
• This rule applies only when Maturity is an end-of-month date for a month having 30 or fewer days.
• When FirstCouponDate and LastCouponDate are both specified, FirstCouponDate takes precedence in determining the coupon payment structure.
• Therefore, the issuer can redeem this bond before the maturity period and pay off their debt.

Bond PricingThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity refers to the rate of interest used to discount future cash flows. Calculates price for bonds with embedded options from a Hull-White interest-rate tree and returns exercise probabilities in PriceTree.