Callable Bond Vs Non-Callable Bond: Yield Is Not The Whole Story

A callable bond allows the issuer to redeem the bond before maturity. A non-callable bond does not give the issuer that same early redemption right. FINRA notes that callable bonds can be retired before the listed maturity date, and if a bond is called, future interest payments stop. Key Takeaways Callable bonds may offer higher stated yields because investors accept reinvestment risk. Non-callable bonds provide more predictable income and maturity planning. YTM is useful for holding-to-maturity analysis, but callable bonds also need YTC. Income investors should compare yield, call date, call price, and credit risk together. Callable bonds may suit investors who want higher income and can tolerate uncertainty. The risk is that the issuer may call the bond when rates fall, forcing the investor to reinvest at lower yields. That can reduce expected income at the worst time. Non-callable bonds are better for investors who prioritize predictability. Retirees, liability-matching investors, and conservative bond buyers may prefer knowing that coupon payments can continue until maturity, assuming the issuer remains solvent. Yield to maturity, or YTM, estimates the return if the bond is held to maturity and payments are made as promised. FINRA describes YTM as the overall rate earned when buying at market price and holding to maturity. For callable bonds, investors should also calculate yield to call. Use the free YTM calculator and YTC calculator to compare the best-case and call-case outcomes. A callable bond is not automatically bad. It is bad only when investors ignore the call risk. FAQ 1. What is the main difference between a callable and non-callable bond? A callable bond gives the issuer the right to redeem the bond before maturity, which can stop future interest payments early. A non-callable bond does not have that early redemption feature, so income is generally more predictable if the issuer remains solvent. 2. Why do callable bonds usually offer higher yields? Callable bonds may offer higher stated yields because investors take on call risk and reinvestment risk. If interest rates fall, the issuer may call the bond, forcing investors to reinvest their money at lower available yields. 3. Should investors use YTM or YTC when comparing callable bonds? Investors should look at both yield to maturity and yield to call. YTM estimates the return if the bond is held until maturity, while YTC shows the return if the issuer calls the bond early. For callable bonds, YTC can be especially important.