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If a bond is redeemed early (called) by the issuer, the holder (investor) is made whole on forgone coupon payments as the make-whole call payment is equal to the net present value of all coupon payments forgone because of the early redemption.
On the other hand, callable bonds mean higher risk for investors. If the bonds are redeemed, the investors will lose some future interest payments (this is also known as refinancing risk). Due to the riskier nature of the bonds, they tend to come with a premium to compensate investors for the additional risk.
Thus, the value of a callable or putable bond can be calculated by discounting the bond's future cash flows at the appropriate one-period forward rates, taking into consideration the decision to exercise the option.
Callable or redeemable bonds are bonds that can be redeemed or paid off by the issuer prior to the bonds' maturity date. When an issuer calls its bonds, it pays investors the call price (usually the face value of the bonds) together with accrued interest to date and, at that point, stops making interest payments.
A callable bond allows the issuer to redeem the bond on a call date before the bond matures at a defined call price, and usually offers a higher yield than simple bonds without the callable feature. As a general rule, when the interest rate bottoms out, the issuer will be less likely to call back the bond.
A callable?redeemable?bond is typically called at a value that is slightly above the par value of the debt. The earlier in a bond's life span that it is called, the higher its call value will be. For example, a bond maturing in 2030 can be called in 2020. It may show a callable price of 102.