Callable bond
A callable bond gives the issuer the right, not the obligation, to redeem it early at a preset call price, typically once interest rates fall enough to make refinancing cheaper.
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A company issues a 10-year bond with a 6% coupon, callable at 103 from year 5. By year 5, market rates for comparable debt have fallen to 3.5%, so the issuer calls the bond and refinances. On €10,000,000 of debt, the interest saving is (6.0% − 3.5%) × €10,000,000 = €250,000 a year.
Where it fits
SubjectCorporate FinanceAdvancedTopicBond & Equity ValuationAdvanced