Legal Definitions - noncallable security

A noncallable security is a type of financial investment that the issuer (the entity that created and sold the security) cannot redeem or buy back before its specified maturity date. This means that once an investor purchases a noncallable security, they are guaranteed to hold it for the full term, receiving all scheduled payments (such as interest) until the maturity date, unless they choose to sell it to another investor in the market. The issuer does not have the option to terminate the investment early, even if market conditions change in their favor (e.g., interest rates drop), providing certainty and predictability for the investor.

• Example 1: Municipal Bonds for a Public Project

  A city council decides to issue 25-year bonds to finance the construction of a new public library. To attract long-term investors like pension funds who prioritize stable, predictable income, the city designates these bonds as noncallable. This means that even if market interest rates fall significantly five years into the bond's term, the city cannot buy back these bonds from investors and reissue them at a lower interest rate. The investors are assured of receiving their original interest payments for the full 25 years.

• Example 2: Corporate Bonds for Business Expansion

  A technology company, "InnovateTech," issues 15-year noncallable corporate bonds to raise capital for a major research and development initiative. Investors purchase these bonds, expecting a consistent return over the long term. If, after seven years, InnovateTech experiences a period of rapid growth and its credit rating improves, allowing it to borrow money at much lower interest rates, the company still cannot force the bondholders to sell their bonds back. The investors will continue to receive the higher interest rate agreed upon at the time of purchase for the remaining eight years.

• Example 3: Long-Term Government Securities

  An individual invests a portion of their retirement savings in a 30-year U.S. Treasury bond, which is a common example of a noncallable security. This means that the U.S. government cannot decide to repurchase this bond from the investor before its 30-year maturity date, regardless of any fluctuations in market interest rates. The investor is guaranteed a steady stream of interest payments and the return of their principal at the end of the 30-year term, offering a reliable long-term investment.