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 characteristic allows the issuer to pay off the bond early, typically at a predetermined price, which is often at or near par value. The primary reason an issuer might choose to call a bond is if interest rates fall after the bond is issued. By calling the bond, the issuer can refinance its debt at lower rates, thereby reducing interest expenses. It’s important for investors to understand that callable bonds often come with higher yields compared to non-callable bonds as compensation for the additional risk that the bond may be called before maturity, which limits the investor’s potential for interest income over time.

Understanding this feature of callable bonds is crucial because it involves considering interest rate movements and the issuer's financial strategy. The other answer choices describe different bond features, which do not align with the specific definition of a callable bond.