Callable Bonds

A Callable Bond is a type of bond that grants the issuer the right to redeem or pay back the bond before its scheduled maturity date. In other words, it's a bond that can be called back by the issuer, providing them flexibility to settle the debt early. This option is often exercised when the issuer sees an advantage, such as taking advantage of lower prevailing interest rates in the market.

The key difference is who benefits from the embedded call/put option and the yields they offer as a result. Puttable bonds offer slightly lower interest rates compared to regular bonds from the same issuer. This is because they benefit bondholders by allowing them to sell the bonds back before maturity, ensuring flexibility. In contrast, callable bonds provide slightly higher interest rates as they favor issuers; issuers can redeem these bonds if interest rates decrease, saving costs. Investors choose based on their preferences and financial strategies.

Call protection is a feature in callable bonds that prevents issuers from prematurely redeeming the bonds for a specified period. For instance, if a bond has a call protection period of 5 years, it means the issuer cannot buy back the bonds before the completion of 5 years from the date of issue. This clause helps safeguard the investors.