<P> The largest market for callable bonds is that of issues from government sponsored entities . They own a lot of mortgages and mortgage - backed securities . In the U.S., mortgages are usually fixed rate, and can be prepaid early without cost, in contrast to the norms in other countries . If rates go down, many home owners will refinance at a lower rate . As a consequence, the agencies lose assets . By issuing a large number of callable bonds, they have a natural hedge, as they can then call their own issues and refinance at a lower rate . </P> <P> The price behaviour of a callable bond is the opposite of that of puttable bond . Since call option and put option are not mutually exclusive, a bond may have both options embedded . </P> <P> Price of callable bond = Price of straight bond--Price of call option; </P> <Ul> <Li> Price of a callable bond is always lower than the price of a straight bond because the call option adds value to an issuer . </Li> <Li> Yield on a callable bond is higher than the yield on a straight bond . </Li> </Ul>

Who benefits when a bond issuer calls a bond