What is a primary characteristic of callable bonds for investors?

A primary characteristic of callable bonds is that they can be redeemed by the issuer before maturity. This feature enables the issuer to take advantage of declining interest rates. When rates fall, the issuer may choose to call, or redeem, the bond early and then refinance the debt at a lower interest rate. This can be a double-edged sword for investors. While callable bonds may offer a higher yield initially to compensate for the risk of being called, investors face reinvestment risk if the bonds are called; they will have to reinvest the proceeds at potentially lower rates.

Understanding this feature of callable bonds is essential for investors as it impacts investment strategy and expectations regarding cash flow and interest rate risks. The higher yields associated with callable bonds generally reflect the additional risks involved, which means that while they might offer attractive returns, there's a trade-off that investors need to consider relative to their risk tolerance and investment goals.