Callable Bond
Definition
A bond that can be redeemed by the issuer before maturity at a specified price, typically when interest rates fall.
Explanation
Callable bonds give the issuer (borrower) the right to refinance at lower rates, similar to how homeowners refinance mortgages. This optionality benefits the issuer at the investor's expense — the investor faces reinvestment risk (receiving cash back when rates are lower). To compensate, callable bonds offer higher yields than non-callable bonds. The yield-to-worst metric assumes the bond will be called at the worst possible time for the investor.