WHAT IS CALLABILITY?

When you were growing up, were you ever called home for dinner? Companies can sometimes "call home," or redeem, bonds they have issued prior to the bonds' maturity dates. Callability is the ability of a bond issuer to redeem its bonds early.

Some bonds—but not all—are issued with a call provision, described in the indenture, or agreement between the bondholder and the bond issuer, as well as in the bond's prospectus. The call provision outlines when the issuer may call the bond; often this date is 10 years after the bond has been issued. For instance, a company may be able to call its 20-year bonds after 10 years. The call provision also outlines the price at which the bond will be called; generally this price equals or somewhat exceeds the par value, or face value, of the bond.

When you buy a bond, you will want to check whether the bond is callable. If it is, you also will want to learn the price the issuer will pay for a bond that it calls. You also should check the precise call date, since you cannot be sure of receiving interest income after that date.