A callable bond, also known as a redeemable bond, is a bond that the issuer may

redeem before it reaches the stated maturity date. A callable bond allows the
issuing company to pay off their debt early. A business may choose to call their
bond if market interest rates move lower, which will allow them to re-borrow at a
more beneficial rate. Callable bonds thus compensate investors for that potentiality
as they typically offer a more attractive interest rate or coupon rate due to their
callable nature.

KEY TAKEAWAYS

 A callable bond is a debt security that can be redeemed early by the

issuer before its maturity at the issuer's discretion.
 A callable bond allows companies to pay off their debt early and benefit
from favorable interest rate drops.
 A callable bond benefits the issuer, and so investors of these bonds are
compensated with a more attractive interest rate than on otherwise
similar non-callable bonds.

What Is a Put Bond?

A put bond is a debt instrument that allows the bondholder to force the issuer to
repurchase the security at specified dates before maturity. The repurchase price is
set at the time of issue and is usually at par value (the face value of the bond).

Puttable bond can be exercised when interest increases, and they will lose from
lower coupon rates. They can force issuer to repurchase security so that they can
earn attractive coupon rates.

KEY TAKEAWAYS

 A put bond is a debt instrument with an embedded option that gives

bondholders the right to demand early repayment of the principal from
the issuer.
 The embedded put option acts an incentive for investors to buy a bond
that has a lower return.
 The put option on the bond can be exercised upon the occurrence of
specified events or conditions or at a certain time or times.
What Is an Interest Rate Swap?
An interest rate swap is a forward contract in which one stream of future interest
payments is exchanged for another based on a specified principal amount. Interest
rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or
vice versa, to reduce or increase exposure to fluctuations in interest rates or to
obtain a marginally lower interest rate than would have been possible without
the swap.

A swap can also involve the exchange of one type of floating-rate for another, which
is called a basis swap.
KEY TAKEAWAYS

Interest rate swaps are forward contracts where one stream of future
interest payments is exchanged for another based on a specified
principal amount.

 Interest rate swaps can exchange fixed or floating rates in order to

reduce or increase exposure to fluctuations in interest rates.
 Interest rate swaps are sometimes called plain vanilla swaps, since
they were the original and often the simplest such swap instruments.

Fixed-to-Floating

For example, consider a company named TSI that can issue a bond at a very
attractive fixed interest rate to its investors. The company's management feels that it
can get a better cash flow from a floating rate. In this case, TSI can enter into a
swap with a counterparty bank in which the company receives a fixed rate and pays
a floating rate.

ASSET CLASSES

KEY TAKEAWAYS

 An asset class is a grouping of investments that exhibit similar

characteristics and are subject to the same laws and regulations.
 Equities (e.g., stocks), fixed income (e.g., bonds), cash and cash
equivalents, real estate, commodities, and currencies are common
examples of asset classes.
 There is usually very little correlation and in some cases a negative
correlation, between different asset classes.
 Financial advisors focus on asset class as a way to help investors
diversify their portfolios.