Bond
A Bond is a kind of investment, where the investor borrows money to Government or a corporate for a determined period at variable / fixed interest rate.
Callable Bond
A bond is said to be callable when the borrower (Government or a corporate) decides to call back the Bond by repay the entire principal amount borrowed when the interest rates are lower.
In callable bond that which is not present in normal loan is that borrower can pay off your entire debts before the maturity period.
To pay off a callable bond the person who borrowed a sum of capital must pay some premium amount along with the principal amount in order to compensate for the loss that will incur to the lenders. This price that the borrower has to pay to the lender is called as call price.
In case when the interest rate falls in the market, then the borrower will be motivated to repay his entire debts. In such cases the investor and borrower will have to face Interest rate risks. So the investor after getting his principal value while trying to lend it to another borrower is forced to lend at the present interest rate availing in the market. This may give him a profit if interest rates go higher but if interest rates are lower; then he is subjected to face interest rate risks. At the same time the borrower is also forced to make reinvestments at the prevailing rate.
