DEFINITION of 'American Callable Bond'

A bond that can be redeemed by the issuer at any time prior to its maturity. Usually a premium is paid to the bondholder when the bond is called.

BREAKING DOWN 'American Callable Bond'

The main cause of a call is a decline in interest rates since the first date of issue. The issuer would likely call the current bonds and distribute new bonds at a lower interest rate. Unfortunately, these types of bonds pose considerable interest rate risk to bondholders. Also, since the issuer can call the bond at any time before maturity, there is also uncertainty as to when the call (and corresponding interest rate exposure) will occur.

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RELATED FAQS
  1. What are the risks of investing in a bond?

    The most well-known risk in the bond market is interest rate risk - the risk that bond prices will fall as interest rates ... Read Answer >>
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    Learn about the biggest advantage to an investor of purchasing a callable bond, which is that it almost invariably pays higher-than-market ... Read Answer >>
  3. What determines the price of a bond in the open market?

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  4. What are the key factors that will cause a bond to trade as a premium bond?

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  5. Why do companies issue callable bonds?

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  6. What types of investors are susceptible to interest rate risk?

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