Callable and Putable Bonds
A callable bond lets the issuer repay it early, usually when rates have fallen — bad for the investor, so callable bonds offer higher yields. A putable bond lets the investor sell it back to the issuer early, which protects the investor and usually means a lower yield.
Some bonds come with an option attached. A callable bond gives the issuer the right to repay early; a putable bond gives the investor the right to demand early repayment. These options change how the bond behaves when interest rates move, and they are priced into its yield. This entry explains both, why call features usually work against the investor, and how to compare such bonds.
- Category
- Bonds and Interest Rates
- Reading time
- 4 min
- Also called
- Callable bond, Putable bond, Puttable bond
- Updated
Callable and putable bonds in plain words
A callable bond can be paid off by the issuer before maturity. When it is called, investors receive the call price — usually face value — plus interest accrued to date, and the interest payments stop.1 Call features are common in corporate and municipal bonds.
Issuers tend to call bonds when rates have fallen, so they can borrow again more cheaply. The investor gets the money back just when reinvesting is least attractive. That is why callable bonds pay more. A putable bond works the other way: the investor can sell it back early, which protects them if rates rise. See Interest Rate.
How to evaluate a bond with options, step by step
Read the call schedule
When can it be called, and at what price?
Check yield to call and yield to worst
The lowest yield across possible call dates. See Yield to Worst.
Compare with similar non-callable bonds
The extra yield is your payment for call risk.
For putable bonds
Check the put dates and price — your exit rights.
Think about rate scenarios
If rates fall, will it be called? If they rise, can you put it?
Check credit quality
Options do not remove default risk — the risk that the issuer fails to pay interest or principal when due.2 See Credit Spread.
Worked examples
Example 1 — Called when rates fall
Call riskAn investor holds a 6% callable bond. Market rates fall to 4%, and the issuer calls the bond at face value.
| Cash returned | Face value plus accrued interest |
| Reinvestment rate now | ≈ 4% |
The investor loses the high coupon exactly when replacing it is hardest.
Example 2 — Price ceiling
Capped upsideA non-callable bond rises to $1,120 when rates fall. A similar bond callable at $1,000 stays close to $1,000–$1,020.
| Non-callable gain | +12% |
| Callable gain | Capped near the call price |
The call feature limits how far the price can rise.
Example 3 — Put when rates rise
ProtectionAn investor holds a putable bond with a put at face value. Rates rise sharply and similar bonds fall to $900.
| Without the put | Worth ≈ $900 |
| With the put | Can sell back at $1,000 |
The put protects the investor — which is why putable bonds usually yield less.
Callable vs. putable
| Aspect | Callable | Putable |
|---|---|---|
| Who holds the option | Issuer | Investor |
| Typically used when | Rates fall | Rates rise |
| Effect on yield | Higher than a plain bond | Lower than a plain bond |
| Effect on price | Upside capped | Downside cushioned |
Why these features matter
Income planning
Calls can end income streams early.
Comparing yields
Higher yields may reflect call risk. See Yield to Maturity.
Rate scenarios
Options change how bonds react to rate moves. See Duration.
Risk control
Puts can limit losses in rising-rate periods.
Advantages and disadvantages
Advantages
- Callable bonds offer higher yields.
- Putable bonds offer protection against rising rates.
- Options let issuers and investors manage rate risk.
Disadvantages
- Callable bonds cap price gains and create reinvestment risk.
- Putable bonds usually yield less.
- Valuation is more complex.
- Call schedules and terms vary widely.
Going deeper
Read as far as you need. Each level builds on the one before it.
Read the terms
Beginner
Call and put features are spelled out in the bond’s documents. Always check them before buying.
Negative convexity
Intermediate
Because calls cap price gains, callable bonds can gain less when rates fall than they lose when rates rise. See Convexity.
Option-adjusted spread
Advanced
Analysts remove the value of the embedded option to compare bonds fairly, using an option-adjusted spread. See Z-Spread and Option-Adjusted Spread.
Common mistakes
Comparing yield to maturity only
Check yield to call and yield to worst.
Expecting big gains when rates fall
Calls cap the upside.
Ignoring call dates
Income can stop early.
Assuming a put removes all risk
Default risk remains.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Callable: the issuer can repay early, usually when rates fall.
- Putable: the investor can sell back early, useful when rates rise.
- Calls raise yields but cap price gains and create reinvestment risk.
- Puts protect investors but lower yields.
- Compare yield to worst, not just yield to maturity.
Frequently asked questions
What happens to my bond if it is called?
Are Treasuries callable?
Is a callable bond a bad investment?
Further learning
- Yield to Maturity
The baseline yield measure.
- Interest Rate
What triggers calls and puts.
- Duration
How options change rate sensitivity.
- Credit Spread
The other part of a bond’s extra yield.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Callable or Redeemable Bonds (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Default (glossary) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.