Answer:When intrest rates are lower than they were when the bonds were issued.
Explanation:Issuers are more likely to call a bond issue if rates have fallen significantly since the bonds were issued (The issuer often sets the call price). Suppose a firm issued bonds at par, initially selling for the face value of $1,000, when rates were 10% (Coupon Rate = Yield to Maturity (YTM) = 10%). Remember that the interest rate a firm pays on its debt depends on a number of internal and external factors. Suppose rates have fallen to 6% after five years. If the bonds have a call provision, the firm probably would elect to call them, because it can issue new 6% coupon bonds and use the proceeds to buy back the outstanding bonds. In those circumstances, the firm’s interest expense per bond would fall from $100 per bond to $60 per bond.
However, the firm must pay transaction costs to conduct this refunding operation. Therefore, it must make sure that the interest cost savings outweigh the transaction costs.
Alternatively, suppose rates have risen to 14% during that five-year period. If the firm called the bonds then, it would need to issue new 14% coupon bonds, which would increase its interest expense unnecessarily. The firm is paying 10% annual interest in a 14% annual interest world. The firm would not choose to pay higher interest rates for borrowed funds, which is what would happen if it called bonds in this situation.