A callable bond is a bond that gives the issuer the option to redeem before maturity.

• A. False
• B. True
• C. Sometimes
• D. Never

Answer: (B)

Callable bonds embed an issuer’s option to redeem the bond before its stated maturity. This call feature lets the issuer refinance the debt if interest rates fall, typically at a defined call price and after a specified call date or period. Because the issuer may exercise this option, investors face reinvestment risk—the possibility they’ll have to reinvest at lower rates if the bond is called. To compensate for this risk, callable bonds often offer a higher yield than noncallable ones. Therefore, the statement is true. If a bond had no option to be redeemed early, it would be noncallable, so claims that there is no early redemption feature would be inaccurate.