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The price behaviour of a callable bond is the opposite of that of puttable bond. By issuing numerous callable bonds, they have a natural hedge, as they can then call their own issues and refinance at a lower rate. As a consequence, the agencies lose assets. If rates go down, many home owners will refinance at a lower rate. In the U.S., mortgages are usually fixed rate, and can be prepaid early without cost, in contrast to the norms in other countries. They own many mortgages and mortgage-backed securities.
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The largest market for callable bonds is that of issues from government sponsored entities. This is comparable to selling (writing) an option - the option writer gets a premium up front, but has a downside if the option is exercised. On the other hand, if interest rates fall, the bonds will likely be called and they can only invest at the lower rate. With a callable bond, investors have the benefit of a higher coupon than they would have had with a non-callable bond. scorer (OptionalCallable): The scoring method. getcandidates (CallableKnowledgeBase, Span, IterableCandidate): Function that: produces a list of candidates, given a certain knowledge base and a textual mention. Another way to look at this interplay is that, as interest rates go down, the present values of the bonds go up therefore, it is advantageous to buy the bonds back at par value. entityvectorlength (int): Size of encoding vectors in the KB. If interest rates in the market have gone down by the time of the call date, the issuer will be able to refinance its debt at a cheaper level and so will be incentivized to call the bonds it originally issued. Thus, the issuer has an option which it pays for by offering a higher coupon rate. In certain cases, mainly in the high-yield debt market, there can be a substantial call premium. The call price will usually exceed the par or issue price. Technically speaking, the bonds are not really bought and held by the issuer but are instead cancelled immediately. In other words, on the call date(s), the issuer has the right, but not the obligation, to buy back the bonds from the bond holders at a defined call price. For callable objects in programming languages, see callable object.Ī callable bond (also called redeemable bond) is a type of bond (debt security) that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity.