Fixed Income · Core
Callable Bond
A callable bond lets the issuer redeem early at a schedule of prices — you sold a call to the issuer and should be paid for it.
Definition
The issuer can call at the make-whole or fixed call price after a lockout. Price cannot rise as freely as a bullet — negative convexity near the call. YTW is the honest yield.
Why it matters
When rates fall, you get the cash back to reinvest lower. That is why callables yield more than bullets — when they do.
Case
A 5% 10NC3 trading at 108 as yields drop. It is called; you own cash at a 3% reinvestment rate. The extra spread was the call premium, not a gift.
How to read it
Lockout, call schedule, and make-whole vs Bermudan. Then YTW. A ‘higher yield’ without the call path is incomplete.
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