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 do companies issue callable bonds?

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  3. What risk factors should investors consider before purchasing a callable bond?

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  4. Why is a premium usually paid on a callable bond?

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  5. What are the advantages of investing in a callable bond?

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