What is an 'American Callable Bond'

An American Callable Bond, also known as continuously callable, is a bond that an issuer can redeem 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, or coupon, saving on future interest payments. Unfortunately, these types of bonds pose considerable reinvestment risk to bondholders, who face the prospect of reinvesting the proceeds of a called bond at lower interest rates that generate less interest income.

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. This unconstrained ability of an issuer to call back their bonds is the primary difference between American callable bonds and European callable bonds, which can be called at a predetermined date prior to maturity.

When an issuer calls its bonds, it pays investors the call price (usually the face value of the bonds) together with accrued interest to date and, at that point, stops making interest payments. Most corporate bonds contain an embedded option giving the borrower the option to call the bond at a pre‐specified price on a date of their choosing. Calls are not mandatory and therefore an option that may or may not be executed.

Callable bonds are generally riskier for investors than non-callable bonds for these reasons. To compensate for such risks, callable bonds typically pay a higher yield than non-callable bonds of the same maturity and credit quality.

Comparing American Callable Bonds to Other Call Options

In addition to American and European callable bonds, bonds can be offered with the following options, according to Raymond James:

  1. Bermuda Call. Issuer has the right to call a bond on interest payment dates only, starting on the first date the bond is callable.
  2. Canary Call. Callable by a predetermined call schedule up to a period of time, then either called or converted to a bullet structure moving forward. 
  3. Make-Whole Call. A call that when exercised by the issuer, provides an investor with a redemption price that is the greater of the following: (1) par value, or (2) a price that corresponds to the specific yield spread over a stated benchmark such as a comparable Treasury security (plus accrued interest)
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