Them silly Americans...callin' their bonds any time they want. That's what an American callable bond is: the company or government issuing the bond can call it at any time prior to its coming due.
Why would an issuer call a bond? Not because they're lonely on a Friday night ("hey bond, u up?"), but because interest rates have gone down or their rating at Moody's went up. The issuer can call the bonds and issue new ones at a lower interest rate, saving them cash.
Why would an investor want to buy these bonds if they can be called at any time? They usually carry higher coupons than non-callable bonds.
Example: Let's say that a pretzel company issues a callable bond paying 9.5% interest. They release a new kind of pretzel that turns out very popular ("now with mustard on the inside!"). The added revenue allows the company to pay off some debts, so their credit gets better and Moody's upgrades them from CCC to BBB status. Meanwhile, interest rates overall drop. The company calls the bonds and reissues new bonds that pay just 7% interest, saving them enough money to invest in new kale-flavored pretzels (the Moody's ratings boost made them very confident).
Related or Semi-related Video
Finance: What is the Maturity of a Bond?95 Views
finance a la shmoop what is the maturity of a bond ?oh come on.
doorbell bash, and prank phone calls whoopee cushions for the teacher? like how mature [person rings door bell]
is that ? right well a bond matures when it comes due. that is a company borrows a
hundred million bucks in 2019 for ten years paying five percent interest or
five million dollars a year to rent that money along the way, and then 2029 comes
around and well the bond matures. and lenders have that hundred million [bond is stamped]
dollars to the company get how much well if the company pays off its bond like it
promised then that last year 2029 the lenders get a hundred five million
dollars in that final year -that is they get the five million bucks in interest
or rent on the money that year and then they get their original principal back.
just like the person who borrowed it promised what happened that is the bond
will have matured. so goodbye whoopee cushions, and late night parties in hello
NPR in a responsible bedtime. [girl snores ]
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