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)
  1. European Callable Bond

    European callable bonds are bonds which can be redeemed by their ...
  2. Callable Security

    A callable security is a security with an embedded call provision ...
  3. Call Protection

    A call protection is a protective provision of a callable security ...
  4. Call Date

    The call date is the date on which a bond can be redeemed before ...
  5. Callable Common Stock

    Callable common stock is a share of ownership in a business, ...
  6. Call Price

    A call price is the price at which a bond or a preferred stock ...
Related Articles
  1. Investing

    Callable Bonds: Leading a Double Life

    Learn the difference between a normal bond and a callable bond. Discover five things you must know before investing and why callable bond lives a double-life that contains so much risks.
  2. Investing

    A Beginner's Guide to Embedded Options in Bonds

    Investors should be aware of embedded options that may be available in bonds as these may affect value. Learn how these differ from a plain vanilla bond.
  3. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  4. Investing

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  5. Investing

    Retail Notes: A Simpler Alternative To Bond Funds

    These securities are meant to be held until maturity, removing the burden of complex pricing that sometimes plagues bonds.
  6. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  1. What determines bond prices on the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market and why bond prices and yields ... Read Answer >>
  2. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
  3. Which factors most influence fixed-income securities?

    Learn about the main factors that impact the price of fixed-income securities, and understand the various types of risk associated ... Read Answer >>
Trading Center