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 risk factors should investors consider before purchasing a callable bond?

    Understand the difference between callable and non-callable bonds and consider all the various risk factors associated with ... Read Answer >>
  2. Why doesn't the price of a callable bond exceed its call price when interest rates ...

    A callable bond provides the issuer (borrowing entity) with an option to redeem the bond before its original maturity date. ... Read Answer >>
  3. Under what circumstances might an issuer redeem a callable bond?

    Understand why an interest rate drop usually compels bond issuers to redeem callable bonds and re-issue them at the new, ... Read Answer >>
  4. Why is my bond worth less than face value?

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  5. In the context of a bond, what does the principal refer to?

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