What is a 'Canary Call'

A canary call is a step-up bond that cannot be called after completing its first-step period. A step-up bond is one in which the bond pays an initial coupon rate for the first designated period of the term, and then moves up to a higher rate for the remaining periods.

With a canary call, the issuer of the bond reserves the option to call back the bond until the first step is reached, but cannot call it back after that point. Exercising a canary call may only happen on predetermined dates.

BREAKING DOWN 'Canary Call'

In a canary call situation, if the issuer of the bond chooses not to call before the canary call expires, the bond will remain a typical step-up bond, where the coupon rate will increase with each step-up period. The issue will detail the specific dates on which a canary call may be called back. In that way, it is similar to a Bermuda option. With a Bermuda option, the holder has the right to exercise that option at pre-determined intervals, or dates, through the lifespan of the contract. 

One advantage for issuers of step-up bonds is that it offers them a protective tactic against falling interest rates. With a canary call option, the issuer loses that advantage once the first step-up period has passed. Canary calls can make step-up bonds more attractive to investors. 

Investors who buy and hold securities like step-up bonds. In general, because they are not impacted as much by interest rate fluctuations as are traditional bonds. Step-up bonds, and those with canary calls, in particular, are especially appealing at times when interest rates are likely to go above the step-up rate quickly. Although, of course, this change in interest rates can often be tough to accurately predict with certainty.

Example of a Canary Call

In this scenario, the Acme Company issues a seven-year bond with a canary call option. The initial coupon rate is 6-percent. The rate steps up to 7-percent after two-years, with additional step-up at intervals of 2 to 3 years. 

 At the four-year point, the open-market rate may have dropped to 5-percent. At this point, Acme Company would love to call the bond and reissue the debt at the lower market interest rate. However, they would no longer have that option due to the canary call. The canary option limited their ability to call back to only the date of the first step-up point, which occurred at the two-year mark.

RELATED TERMS
  1. Multi-Callable Bond

    A multi-callable bond allows an issuer to redeem its bonds on ...
  2. American Callable Bond

    An American Callable Bond can be redeemed by the issuer at any ...
  3. Conditional Call Option

    A conditional call option requires a bond's issuer to replace ...
  4. Bond Option

    A bond option is an option contract in which the underlying asset ...
  5. Call Privilege

    A provision that gives a bond issuer the option to redeem all ...
  6. Rate Level Risk

    Rate level risk refers to the fact that the value of an existing ...
Related Articles
  1. Investing

    Quantum is Coming

    Alphabet's forthcoming Chrome Canary browser is just the "canary" in the coalmine--quantum computing is coming faster than you might think.
  2. Investing

    Here's What Happens When a Bond Is Called

    Learn why early redemption occurs and how to avoid potential losses.
  3. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  4. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  5. Investing

    Corporate Bonds for Retirement Accounts

    Corporate bonds are usually the preferred choice in retirement accounts. Here are some of the benefits of corporate bonds, and strategies for a portfolio.
  6. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  7. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  8. Investing

    How Bonds Are Vital to a Successful Portfolio

    While bonds are a vital part of an investment portfolio, they are often ignored.
  9. Investing

    Six biggest bond risks

    Bonds can be a great tool to generate income, but investors need to be aware of the pitfalls and risks of holding corporate and/or government securities.
RELATED FAQS
  1. What are the risks of investing in a bond?

    Are you thinking of investing in bond market? Learn more about bond market investment risk, including interest rate risk, ... Read Answer >>
  2. 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 >>
Trading Center