Non-Callable Bonds
Non-callable bonds are also known as non-redeemable. non-callable bonds can only be paid out at maturity. The issuer of a non-callable bond can’t call the bond prior to its date of maturity unless penalties are paid to security holders. It is different from a callable bond.
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What is a Non-Callable Bond?
Non-Callable bonds are favorable for the investors because they guarantee a fixed income payment even if there is volatility in the market. A callable bond can become a non-callable bond in some cases, after a certain period of time once they are issued. This time is known as the “Protection Period”.
One of the most common examples of a non-callable bond in US Treasury Stock. For a non-callable bond, the bond’s issuer faces risk as the interest rate is locked in till the bond matures. This means even if the interest rate declines, the issuer must continue paying the higher interest rate until maturity. Hence, the interest rate of a non-callable bond tends to be lower than the interest rates of callable bonds.
Features of a non-callable bond:
The main feature of a non-callable bond is that the bond’s interest rate is guaranteed until the bond matures. Non-callable bondholders are protected from income loss that is caused by premature redemption. They are guaranteed regular interest or coupon payments as long as the bond has not matured, which ensures that their interest income and rate of return are predictable.
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How does it work?
Many investors choose to invest in non-callable bonds whereby the interest rate is fixed irrespective of market movements. If the interest rate is 8% when the bond is purchased, and 10 years later the rate goes down to 6%, the issuer of a non-callable bond must still pay 8% interest until the date of maturity.
How it is different from a callable bond?
Callable bonds are the forms of bonds where the company issuing the bond has the choice to call or redeem the bond earlier than its maturity. In non-callable bonds, the company issuing the bond does not hold the choice to redeem the bond before it reaches maturity. In the case of callable bonds, the rate of interest risk is usually better for which the investor is rewarded with a high yield whereas in non-callable bonds the rate of interest risk is lower compared to callable bonds.
Key Takeaway:
The Non-callable bonds come with a lower interest rate as the rate is fixed until the date of maturity. They cannot be called until the date of maturity. Most treasury securities and municipal bonds are non-callable. A bond may also be non-callable either for the duration of the bond’s life or until a predetermined period of time has passed after initial issuance.
Author – Saachi Lodha
About the Author – A passionate professional with knowledge of Accounting and Finance and currently exploring Financial Risk Management (FRM) to gain knowledge and exposure. As a part of the FRM course also writing blogs to explore the field more and deep dive into the content.
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