Chartered Financial Analyst (CFA) Practice Exam Level 2

What is a characteristic of American callable bonds?

1. They can only be called on the call date.

2. They can be called at any time.

3. They have a fixed coupon rate.

4. They are convertible into stocks.

The correct answer is: They can be called at any time.

American callable bonds have the distinctive feature that they can be called at any time during the life of the bond, at the discretion of the issuer, as long as it adheres to the terms outlined in the bond indenture. This characteristic allows the issuer the flexibility to refinance their debt if interest rates decrease or if they otherwise wish to reduce interest payments. The call feature is beneficial for issuers, providing an opportunity to call back bonds when it makes financial sense for them, often resulting in cost savings. This means investors face uncertainty regarding the bond's duration and total return, as the bond could be redeemed earlier than anticipated. In contrast, other bond types, such as European callable bonds, typically allow for calls only on specific call dates, limiting the issuer's flexibility compared to American callable bonds. The fixed coupon rate is a common feature of many bonds but does not specifically relate to the callable nature. Convertible bonds provide an option to convert into stock, a feature that is not inherently related to the callability of the bond.