Recently, I have heard that the pricing of callable bonds produces a strange relationship between coupons and the tenor of the call option. I have always thought that for a callable bond, when rates fall, the issuer of the bond seizes the chance to exercise the call and payback the principal (buyback the bond), and reissues at a lower rate/yield. It is for this reason that a callable bond, as compared to its non-callable equivalent, offers higher coupons as a form of compensation for investors. However, I chanced upon certain pricing algorithms that seem to suggest that for very long tenor call options (packaged with the bond), the coupons of the callable bonds may even decrease as compared to a callable bond but with a slightly shorter tenor. For example, the pricing algorithm produces: Coupon (5Y Call with 10Y Bond) > Coupon (3Y Call with 10Y Bond) but Coupon (9Y Call with 10Y Bond) < Coupon (8Y Call with 10Y Bond) Question : Is the true? / Is the pricing algorithm working correctly? What is the rationale behind it?