This paper analyzes the effects of a firm's financial distress costs on the issuance terms and redemption of callable bonds. Here, callable bonds include both convertible and non-convertible bonds. The paper adopts a game-theoretic model between managers-shareholders, who are strategic decision-makers, and bondholders, who are price-takers. When a firm issues non-convertible callable bonds, it has the same equilibrium bankruptcy probability as when issuing standard bonds without embedded options; therefore, the call option has no advantage in relation to financial distress costs. However, financial distress costs do affect the timing of call option exercise. As financial distress costs increase, the call price tends to escalate relatively, and thus the firm has an incentive to accelerate the call to reduce the price burden. Since calling provides the firm with an opportunity to adjust its capital structure, this result suggests that firms with greater financial distress costs have a stronger incentive to exercise the call option. By issuing convertible callable bonds, a firm can lower the probability of early redemption or default compared to non-convertible bonds. That is, by issuing convertible callable bonds, the firm can enjoy the benefits of borrowing while lowering expected financial distress costs. This is attributable to the design of convertible bonds, in which the conversion option is exercised when the firm's performance is poor. Furthermore, this result suggests that in an environment of information asymmetry, high-quality firms can send separating signals about firm value by issuing non-convertible bonds, because firms can bear signaling costs through non-convertible bond issuance. Moreover, this can explain the frequent phenomenon of call option exercise that induces conversion during periods of poor firm performance. Ultimately, the exercise of a call option on convertible bonds can be understood as negative information about firm value. The equilibrium call price of convertible bonds, unlike that of non-convertible bonds, is not uniformly affected by financial distress costs. This is because the exercise of the call option simultaneously entails equity conversion and the elimination of the possibility of financial distress, thus producing compound effects.