Callable Bond

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Some corporate bonds and municipal bonds have a feature that gives the issuer of the bond the right to "call" in the bond before the maturity date (bonds). The issuer may decide to exercise this right if it no longer wants to keep paying what is usually a generous coupon rate to the bondholders. "Calling" the bond means that the bondholders must return the bonds and are given back the original value of the bonds. The bondholders sometimes get a bonus for having to give up the bond before the maturity date. This can be a problem for a bondholder who did not buy the bond when it was first issued but bought it at a later date in what is sometimes called the secondary market, and actually paid more for the bond than its face value. The bondholder might have done this because he was attracted by the high coupon rate. For bondholders who own bonds through a mutual fund this is not so much of a problem, because that "called" bond is just one out of many bonds in the mutual fund's portfolio of bonds. But for an investor who has bought individual bonds it can be an unpleasant surprise to find the bond being called; the stream of generous coupon payments will cease, and there may be a loss on the amount received back from the issuer versus what was paid. This is an example of caveat emptor and underscores the importance of always reading the fine print to make sure you are fully aware of what you are buying. A bond issuer will typically call in a bond because interest rates in general have fallen (see Federal Funds Rate) and it wants to issue a new set of bonds at a lower coupon rate, thereby saving money. Not all bonds are callable but many are, especially municipal bonds. Government bonds issued by the federal government are generally not callable.