What can trigger call risk in bond investing?

Call risk in bond investing occurs when a bond issuer has the option to redeem the bond before its maturity date, typically when interest rates decrease. When interest rates decline, issuers may choose to call their existing bonds that have higher interest payments and refinance at a lower rate. This means that the investor could lose out on the higher interest payments they were expecting as the bond is called away.

This situation affects investors because, upon having their bonds called, they would need to reinvest their principal in a lower interest rate environment, leading to a potential loss of income. Therefore, a decrease in interest rates is a significant trigger for call risk since it creates the financial incentive for issuers to redeem their bonds early. Understanding this dynamic is essential for bond investors as it influences decisions about managing portfolios and expectations regarding cash flows from bond investments.