Canadian Securities Course (CSC) Level 1 Practice Exam

What is a callable bond?

1. A bond offering unlimited call options

2. A bond that cannot be paid off before maturity

3. A bond where the issuer can pay it off before maturity

4. A bond with fixed interest rates

The correct answer is: A bond where the issuer can pay it off before maturity

A callable bond is characterized by the issuer's ability to pay it off before its maturity date. This feature allows the issuer to redeem the bond at a specified price before it reaches maturity, which can be beneficial for the issuer if interest rates fall. By calling the bond, the issuer can refinance the debt at a lower interest rate. The other options presented do not accurately define a callable bond. The notion of unlimited call options does not apply; rather, the call feature is defined within specific terms. A bond that cannot be paid off before maturity describes a non-callable bond, which is the exact opposite of what a callable bond entails. Lastly, while many callable bonds may have fixed interest rates, the fixation of interest rates alone does not define a callable bond, as it primarily revolves around the redemption feature.