What is European Callable Bond?

European callable bond is a type of bond that can be redeemed by the issuer at a predetermined date prior to the bond’s actual maturity date.

Key Takeaways

  • European callable bond is a type of bond that can be redeemed by the issuer at a predetermined date prior to the bond’s actual maturity date.
  • European callable bonds have only one possible call date, whereas American callable bonds, for example, may be called at any time.
  • European callable bonds pose interest rate risk to bondholders.

Understanding European Callable Bond

European callable bonds are not callable bonds issued in Europe, rather they are a specific style of callable bonds. The distinguishing feature of European callable bonds is that they have only one possible call date, whereas American callable bonds, for example, may be called at any time. European callable bonds behave similarly to plain vanilla bonds after the call date, with a comparable coupon and time to maturity.

The main reason to call most debt securities is if there is a decline in interest rates since the date that the bonds were issued. 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, potentially forcing bondholders to reinvest at a lower rate. European callable bonds pose interest rate risk to bondholders, although not as much as American callable bonds.

In addition to European and American callable bonds, also referred to as redeemable bonds, there are also Bermuda callable bonds. Bermuda-style bonds are somewhat like a combination of the American and European styles where the issuer has the right to call the bonds on specific dates, typically beginning on the first day that the bond is callable, but only after a call protection period of an agreed-upon length, during which it is not callable. For example, a European 10-year callable bond may have a call protection provision that prevents the bond from being called for the first two years of its lifetime.

Call Options on European and Other Callable Bonds

Here is a closer look at the specific call-date options on European callable bonds and other types of callable bonds, as described by Fundsupermart:

  1. European Call: This type of call is also known as one time only call. The issuer has the right to call a bond on a predetermined date; the issuer can only call the bond one time.
  2. American Call: The issuer may call the bond any time between the date the bond is callable and the date the bond matures.  
  3. Bermuda Call: The issuer of the bond may only call a bond on interest payment dates.
  4. Make-Whole Call: The issuer of this type of bond may call the bond before the maturity date at par plus a make whole premium. In this scenario, the call price is determined by using a comparable Treasury in addition to a predetermined yield spread; the call price cannot be predicated, nor can the yield to call.