A callable bond is a type of bond issue that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches the date of maturity. Generally, the terms of the callable bond will include guidelines of what types of conditions must exist before the callable bond is considered eligible for early redemption. The terms and conditions also often specify a call date that is considered to be the earliest possible date that the bond issuer can actually exercise the demand for payment prior to the bond maturity.

Sometimes referred to as redeemable bonds, callable bonds tend to include provisions that ensure the investor that in the event of a call date being exercised, the investor will receive all interest due up to the date that is issued for the call. Along with honoring the rate of interest guaranteed for the duration for the bond, the issuer usually also honors a rate that is slightly above the par and applies it to the interest due. This usually helps to offset the difference between the interest generated up to the call date and the amount of interest that would have accrued if the bond had continued until the original maturity date.

There is no guarantee that a callable bond will in fact be called at some point before the actual maturity date. Generally, bonds of this type are not called unless economic conditions indicate that an early call is in the best interests of the issuer. For example, the call date option may be exercised if there is a decrease in the interest rate that was applied to the original bond. Under these conditions, it is certainly advantageous for the issuer to recall all bonds, pay them off, and issue new bonds at the lower rate of interest.

For the investor, a callable bond is still considered to be a good investment, even with the chance of an early call date. This is because the callable bond tends to have a higher coupon that non-callable bonds, so even in the event that a twenty year bond is called at the ten year point, chances are the investor will still realize a higher return than with other types of bonds.