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Warning
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Simple English definitions for legal terms
callable security
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A quick definition of callable security:
A callable security is a type of investment that can be redeemed or bought back by the issuer before its maturity date. It is a type of collateral or assurance given to a creditor to guarantee repayment of any money or credit extended to a debtor. A security can be an instrument that shows ownership rights in a company, creditor relationship with a company or government, or other rights. It can be a stock, bond, note, or other financial instrument. Securities have no intrinsic value and their value depends on the financial condition or future prospects of the issuer.
A more thorough explanation:
A callable security is a type of redeemable security. A security is collateral given or pledged to guarantee the fulfillment of an obligation. It can be an instrument that shows ownership rights in a company, creditor relationship with a company or government, or other rights. A callable security is a type of bond that can be redeemed by the issuer before it reaches maturity. This means that the issuer can "call" the bond back and pay the investor the principal amount plus any interest owed.
Let's say Company A issues a callable bond with a maturity of 10 years and an interest rate of 5%. After 5 years, interest rates in the market drop to 2%. Company A decides to call back the bond and issue a new bond with a lower interest rate. The investor who bought the callable bond will receive the principal amount plus any interest owed up until the call date.
This example illustrates how a callable security can benefit the issuer by allowing them to refinance at a lower interest rate, but it can also be a risk for the investor who may not receive the full return they expected if the bond is called back early.