A Guide to Choosing Between Callable and Non-Callable Bonds

callable vs noncallable bonds

When you’re choosing bonds, you’ve got two main options: callable and non-callable. Callable bonds give issuers the option to cash them in early, while non-callable bonds don’t. Let’s compare them, so you can decide which fits your investment goals better.

What is a callable bond?

A callable bond is like a promise from a company or a city to pay back the money you lend them, but they can choose to pay it back before the due date. This gives them flexibility to change their debt if interest rates go down. Different types of callable bonds have different rules for when they can be cashed in early.

Pros of callable bonds

  • Higher Yields: Callable bonds often pay out more money compared to non-callable bonds. This is to make up for the extra risk investors take with callable bonds.
  • Flexibility for Issuers: Companies or cities can use callable bonds to manage their debts better. When interest rates are low, they can pay off their debts early and borrow money again at the lower rates.

Cons of callable bonds

  • Call Risk: With callable bonds, there’s a risk called call risk. If the issuer pays back the bond early, you might stop getting interest payments suddenly. Also, you might have to invest your money again at lower rates, which means you could end up with less money.
  • Uncertain Cash Flows: Callable bonds make it hard to know how much money you’ll get and when. If the bond gets paid back early, you might not get all the interest payments you expected. This uncertainty can mess up your plans for how much money you’ll have.

Different types of callable bonds

Here are the different types of callable bonds: 

  1. American Calls: With American calls, the issuer can decide to pay back the bond anytime before it’s supposed to end. This gives the issuer a lot of flexibility to react to changes in the market.
  2. European Calls: European calls let the issuer pay back the bond only once, and it’s on a specific date set in advance. This means the issuer has less flexibility compared to American calls.
  3. Bermuda Calls: Bermuda calls allow the issuer to pay back the bond at regular times, like every month, quarter, or year. It gives investors some predictability while still giving flexibility to the issuer.
  4. Canary Calls: Bonds with Canary calls can be paid back by a certain date. After that date, the issuer can’t pay it back early. This makes investors feel more secure because they know the bond can’t be paid back before a certain time.
  5. Verde Calls: Verde calls let the issuer pay back the bond on specific dates, but these dates become less frequent as time goes on. This gives investors more certainty about whether the bond will be paid back early or not over time.

Callable bonds have both good and bad points for investors and issuers. They might offer higher returns and flexibility for issuers, but they also come with risks like call risk and not knowing for sure when you’ll get your money back. Investors need to understand how callable bonds work and what they mean for their investment goals.

What is a non-callable bond?

A non-callable bond is different from a callable bond. It’s a bond that the issuer can’t pay back before it’s supposed to end. This gives investors peace of mind because they know they’ll get their fixed interest payments until the bond ends, without worrying about it being paid back early.

Pros of non-callable bonds

  • Stable Cash Flows: Non-callable bonds offer stability and predictability in cash flow. Investors can depend on getting regular interest payments until the bond matures because these bonds can’t be paid back early.
  • Reduced Reinvestment Risk: Investors don’t have to worry about reinvesting at lower rates if a non-callable bond is paid back early. They’ll keep getting their interest payments until the bond matures, no matter what’s happening in the market.

Cons of non-callable bonds

  • Lower Yield Potential: Non-callable bonds typically offer lower returns compared to callable bonds. Callable bonds compensate investors for the risk of early redemption with higher yields.
  • Limited Flexibility for Issuers: Non-callable bonds restrict issuers from refinancing debt or taking advantage of favorable market conditions. Unlike callable bonds, which allow issuers to redeem bonds early and issue new debt at lower rates, non-callable bonds bind issuers to honor interest payments until maturity.

Types of non-callable bonds

Here are some non-callable bonds you can invest in. 

  1. Traditional Non-callable Bonds: These bonds don’t allow the issuer to redeem them early. They promise investors steady cash flows without the risk of surprise early redemption.
  2. Fully Non-callable Bonds: These bonds stay non-callable until they mature. They offer investors the safest option for fixed interest payments until the bond’s end.
  3. Non-callable Period Bonds: These bonds start non-callable but may become callable after a set time. Investors enjoy guaranteed interest payments initially, but there’s a chance of early redemption later.

Non-callable bonds offer stability and protection from surprises, making them popular for investors who want a steady income. They might offer lower returns and tie issuers’ hands a bit, but their reliability makes them a smart choice for many portfolios.

Callable vs. Non-callable: A Comparison

Callable bonds and non-callable bonds each have their own unique traits. Here’s a simple comparison to help you understand the differences:

Yield potential

  • Callable Bonds: These bonds usually offer higher yields than non-callable bonds. That’s because they compensate investors for the risk of early redemption.
  • Non-callable Bonds: These bonds often have lower yields compared to callable bonds. They focus more on providing stability and steady cash flow without the risk of early redemption.

Risk exposure

  • Callable Bonds: Investors in callable bonds face call risk. This means they might miss out on future interest payments if the issuer redeems the bond early.
  • Non-callable Bonds: Non-callable bonds reduce this risk. Investors can count on getting regular interest payments until the bond matures, without worrying about it being redeemed early.

Issuer flexibility

  • Callable Bonds: These bonds give issuers flexibility. They can manage their debt and take advantage of lower interest rates by redeeming bonds early and issuing new ones.
  • Non-callable Bonds: Issuers of non-callable bonds have less flexibility. They’re committed to paying interest until maturity without the option to redeem the bond early.

Investor preference

  • Callable Bonds: Some investors like callable bonds because of the chance for higher yields, even though they come with risks. They might be okay with the uncertainty of early redemption.
  • Non-callable Bonds: Others prefer non-callable bonds for their stable income and protection from call risk. They want consistent cash flow and a safe investment.

Market outlook

  • Callable Bonds: These bonds might be good if you think interest rates will go down or if the bond market looks promising. They’re appealing to investors who are optimistic about bonds.
  • Non-callable Bonds: If you want steady income no matter what’s happening in the market, non-callable bonds could be right for you. They’re a safe bet for investors looking for reliability and predictability.

Know which type of bond to invest in

When picking between callable and non-callable bonds, think about what you want and how much risk you’re okay with. Callable bonds may offer more money, but there’s a chance you could lose out on future payments. Non-callable bonds give steady payments with less risk, but the returns might not be as high. Consider what matters most before deciding.


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