Definition of Callable Bonds
A Callable bond gives the issuer a right to redeem or repay the debt to the lender before the maturity date. The bonds that are callable often bear higher interest rates to compensate for the factor that the issuer can call them when necessary.
The investors that invest in callable bonds are exposed to the uncertainty of distorted fixed cash flow stream (interest payments) because the issuer has the legal right to redeem the bonds. The issuer can do this when the interest rates in the market are lower than the coupon they are paying to exist lenders. By redeeming and paying the money back to lenders the issuer can then raise newer debt at a more favourable interest rate prevailing in the market.