Final answer:
Callable bonds can be redeemed at the choice of the bond issuer, allowing them to take advantage of lower interest rates. Bondholders only have rights to the terms agreed upon at issuance and may lose potential interest income if a bond is called.
Step-by-step explanation:
Callable bonds can be redeemed before their maturity date at the choice of the bond issuer, not the bondholder. This feature allows the issuer to benefit from favorable interest rate environments. If the issuer can borrow money at a lower interest rate than the callable bond, they may choose to call the bond, pay off investors, and reissue new debt at a lower cost. Bondholders, on the other hand, have no such right and are subject to the terms set forth by the issuer at the time of bond issuance.
A firm that seeks to borrow money can issue bonds with the right to call the bond before maturity. This gives the firm flexibility to manage its debt obligations in response to changing economic conditions. However, bondholders must be aware that called bonds may result in a loss of potential interest income and must consider the call features when evaluating the potential risks and rewards of investing in callable bonds.