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.


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.

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