Exercising the Option on Callable Bonds

As an investor, you do not get to choose whether to exercise the option on callable bonds. This decision lies in the hands of the issuing organization. With a callable bond, the issuer can decide to buy out the bond holder at the call date for a specified, predetermined premium. Both parties generally profit from this option.

Issuer Profits

The issuer is prepaying on a debt, which does come with some financial penalties. Just like prepaying a mortgage or auto loan, prepaying a bond means paying a surcharge to close the contract for good. However, the debt is removed from the issuer's liabilities, and this can make the issuer a better candidate for new loans or investments.

Borrower Profits

As a borrower, you will get an immediate payment that is always at least equal to the amount invested and often much higher. You may even have purchased a bond with an option that presented large profits if it was exercised. You can take the profits as income or reinvest them into new bonds or other securities. Because of these many benefits, callable bonds are often regarded as having a higher potential for profit than standard bonds. You may search specifically for bonds with options when you are looking to invest.

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