Most publicly issued bonds are callable. A callable bond is less attractive to bondholders than a noncallable bond. A callable bond can be bought back by the company at a call price that is less than the true value of the bond. As a consequence, callable bonds are priced to obtain higher stated interest rates for bondholders than noncallable bonds.

Generally, companies should exercise the call provision whenever the bond’s value is greater than the call price.

There is no single reason for call provisions. Some sensible reasons include taxes, greater fl exibility, management’s ability to predict interest rates, and the fact that callable bonds are less sensitive to interest rate changes.

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