Multi-Callable Bond

A multi-callable bond is a debt offering that allows the issuer to call or redeem its bonds on particular future dates that are specified at the time of the bond issuance. Since the issuer benefits by gaining flexibility with regard to the bond's maturity, the coupon on the bond may be higher than the prevailing market interest rate.

Multi-callable bonds or notes are generally of two types: step-up bonds or accrual bonds. For multi-callable step-up notes, the coupon that the bonds pay will increase or step up if the notes are not called by the issuer. Coupon payments on the majority of step up notes are paid twice a year or quarterly, although there are some that are paid on a more regular monthly or annual basis.

Accrual notes are virtually the direct opposite of step up notes. The interest rate on accrual bonds remains fixed, the note accrues interest at a consistent rate over time, and investors receive no coupon payments from an accrual note until the bond is either called or matures, whichever happens first.

Many issuers may seek to redeem all or some of their bonds prior to their maturity date, ideally at a price that reflects a call premium above face value. Debt issuers stipulate call provisions before the bonds are purchased, and the bond contract provides the initial and any future call dates, along with the call premium at each date. If an issuer expects to retire its outstanding debt over a specific time frame, its call provision will feature multiple redemption dates. Call provisions are most often a feature of corporate and municipal bonds.

The main reason why an issuer calls their bonds is to take advantage of falling interest rates. Bond issuers can benefit financially by paying off their higher-rate bonds and reissuing the debt at the lower interest rate. This saves the issuer money by lowering its cost of borrowing. However, investors often suffer when their bonds are called because they may be faced with reinvesting the money at a lower, less attractive rate. For example, an investor with $10,000 invested in a 10-year bond with a 5 percent coupon would expect to earn $500 a year from that bond, for a total of $5,000 over the life of the bond before getting the initial $10,000 investment back at maturity. But if the bond is called early after only five years, the investor would lose $2,500 in expected income.

An issuer may also call its bonds due to what is known as an extraordinary event. As stated by the Securities and Exchange Commission, this provision allows an issuer to retire its bonds before maturity if a certain, pre-specified event occurred, such as the destruction of the project the issuer is financing.