What does it mean if a bond is classified as 'callable'?

A callable bond is defined by its feature that enables the issuer to redeem it before its maturity date. This means that the issuer has the right to pay back the bond's principal amount to bondholders earlier than the original agreed-upon date. Callable bonds typically come into play when interest rates decline, allowing issuers to refinance their debt at a lower cost. The call feature can be beneficial for the issuer but introduces reinvestment risk for investors since they may need to find new investment opportunities at potentially lower interest rates if the bond is called.

In contrast, the other options do not accurately define a callable bond. Selling a bond at any time reflects market liquidity, not the callable aspect. Converting a bond into stock relates more to convertible bonds. The statement regarding higher interest payments may apply to callable bonds in some contexts since they often offer higher yields to compensate for the call risk, but it does not define the callable feature itself. Hence, the correct identification of a callable bond directly correlates with the issuer's ability to redeem it before maturity.