What is a callable bond?

A callable bond is defined as a bond that can be redeemed by the issuer before its maturity date. This feature provides the issuer with financial flexibility, allowing them to take advantage of falling interest rates or other economic conditions by refinancing their debt at a lower cost. When interest rates decrease, the issuer may choose to call the bond, repay the bondholders, and then reissue new bonds at the lower prevailing rates. This characteristic differentiates callable bonds from other types of bonds, as they provide an option for issuers that could lead to potential loss of interest income for investors if the bond is called unexpectedly.

The other options describe different characteristics of bonds that do not specifically pertain to the callable nature. For example, a bond with a fixed interest rate refers to its interest payment structure, while bonds issued by state or local governments encompass municipal bonds. A bond that cannot be sold until maturity describes a term commonly associated with certain types of certificates of deposit or similar investments, not typically related to the features of callable bonds.