SIE: 5.1.1.2.7. Call Risk

5.1.1.2.7.  Call Risk

Callable bonds are subject to call risk, the risk that a bond will be called by the issuer when interest rates are declining. A bond is called when the issuer pays the principal back the bondholders early. When interest rates decline, the issuer of a bond, a corporation for example, may not want to continue to pay interest payments at the old higher rate, so the company may go into the credit markets and issue new bonds at a new lower rate and use this money to call the bonds (that is pay the bondholders their principal back