Call Risk
Many bonds contain a "call' provision, giving the bond issuer the right to retire (redeem) the debt before the scheduled maturity date. For the issuer, the chief benefit of a call feature is that the issuer may be able to replace outstanding debt with lower-interest-cost new debt.
A call feature creates uncertainty as to whether the bond will remain outstanding until its maturity date. The risk to investors in callable bonds is losing a bond with a higher rate of interest when rates have declined and the issuer decides to call its bonds.
When a bond is called, an investor may be faced with having to reinvest of the principal amount in securities with lower yields. Calls also tend to limit the appreciation in a bond's price that could be expected when interest rates decline.
Given the additional uncertainties of holding callable bonds, a call feature can put the investor at a disadvantage. However, callable bonds typically carry higher yields than noncallable bonds to compensate for these uncertainties. The call feature may range from 3 months to 5 years (or longer), and should be carefully examined prior to making an investment in callable bonds.