Callable bonds have several benefits, but most favor of the corporation that issues the bond rather than the investor. A bond is a loan that investors give a company that needs to raise capital. The company promises to make interest payments to the investor for a set number of years and return all the original investment with the final payment. Callable bonds allow companies to pay investors off early if it's in the company's best interest to do so. Callable bonds usually pay a higher interest rate to compensate for this.
A bond for a company can be compared to a mortgage for a homeowner. If interest rates decline, a homeowner would consider refinancing his mortgage to a lower rate to save on interest payments. Companies that have issued callable bonds can benefit in the same way if general interest rates go down. Companies that have issued callable bonds with a high interest rate would pay off the bonds and reissue new ones to the public at a lower interest rate.
If a company has the good fortune to find itself flush with cash, callable bonds would give the company flexibility to either reduce or eliminate its debt to investors at any time. Rather than keep paying interest on a bond issue for a number of years, the company could simply notify bondholders that it intends to call the bonds at a particular price on a certain day.
Companies that issue callable bonds can stay more nimble when it comes to restructuring their debt if need be. They can replace short-term bonds with long-term bonds, and vice versa. Company managers can use callable bonds to shift gears and seize better opportunities when necessary rather than be shackled to a bond issue that could take years to mature.
Companies can strong-arm investors who own convertible corporate bonds. Convertible corporate bonds are essentially bonds that investors buy that can be converted to shares of common stock. When a company calls its bonds before their maturity date, it forces the conversion of convertible corporate bonds. Investors who own these bonds would receive a predetermined number of shares of the company's stock. This is likely to happen if interest rates take a steep dive.
- Thinkstock/Comstock/Getty Images