What is a '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 maturity date, such as the last coupon date. European callable bonds behave similarly to plain vanilla bonds after the call date, with a comparable coupon and time to maturity. European callable bonds pose interest rate risk to bondholders, although not as much as American callable bonds.

BREAKING DOWN '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. The main cause of a call for most debt securities 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. 

In addition to European- and American-style callable bonds, also referred to as redeemable bonds, there are also Bermuda-style callable bonds. Bermuda-style bonds are somewhat like a combination of the American and European styles: 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.
RELATED TERMS
  1. American Callable Bond

    An American Callable Bond can be redeemed by the issuer at any ...
  2. Call Risk

    Call risk is the risk faced by a holder of a callable bond that ...
  3. Callable Security

    A callable security is a security with an embedded call provision ...
  4. Called Away

    Called away is a term for the elimination of a contract before ...
  5. Call Privilege

    A provision that gives a bond issuer the option to redeem all ...
  6. Bond

    A bond is a fixed income investment in which an investor loans ...
Related Articles
  1. Investing

    Here's What Happens When a Bond Is Called

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

    Why Companies Issue Bonds

    When companies need to raise money, issuing bonds is one way to do it. A bond functions as a loan between an investor and a corporation.
  3. Investing

    A Guide to High Yield Corporate Bonds

    The universe of corporate high yield bonds encompasses multiple different types and structures.
  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

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  6. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  7. 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.
  8. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
RELATED FAQS
  1. Under what circumstances might an issuer redeem a callable bond?

    Understand why an interest rate drop usually compels bond issuers to redeem callable bonds and re-issue them at the new, ... 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 >>
  3. 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 >>
Trading Center