American Callable Bond

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).