What is meant by a callable bond?

A callable bond refers to a bond that provides the issuer with the right to redeem it before its maturity date at predetermined times and prices. This mechanism allows the issuer to take advantage of favorable interest rate movements; for example, if interest rates decline, the issuer can call the bond and reissue new debt at a lower interest rate, thereby reducing its financing costs.

The design of callable bonds includes call provisions that outline when and under what conditions the bond can be redeemed early. This characteristic is crucial for investors to understand, as callable bonds often come with higher yields compared to non-callable bonds to compensate for the call risk—where the bond might be called when market conditions are unfavorable for the investor.

This is why the correct description is the one that highlights the bond's redeemable feature by the issuer before the maturity date. Understanding this aspect helps investors make informed decisions about the risks and potential benefits associated with callable bonds.