DEFINITION of 'European Callable Bond'

A bond that can be redeemed by the issuer at a predetermined date prior to maturity, such as the last coupon date. European callable bonds behave similarly to a vanilla bond after the call date, with a comparable coupon and time to maturity. These types of bonds pose interest rate risk to bondholders, though not as much as American callable bonds.

BREAKING DOWN 'European Callable Bond'

The distinguishing feature of European callable bonds is that they have only one possible call date, whereas American callable bonds may be called at any time. The main cause of a call is a decline in interest rates since the date of issue. If the interest rate is lower on the call date, the issuer would likely call the outstanding issue of bonds and distribute a new issue at a lower interest rate.

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RELATED FAQS
  1. 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 >>
  2. What are the advantages of investing in a callable bond?

    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. Under what circumstances might an issuer redeem a callable bond?

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  4. What happens to the price of a premium bond as it approaches maturity?

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  5. What is the difference between yield to maturity and the yield to call?

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