Canary Call

In finance, the term canary call refers to a clause which may be included in step-up bonds which gives the bondholder the right to terminate the bond within one or more of the sub-term which make up the full bond term. If the bond is not cancelled within that time frame, its bearer must continue to hold it until it matures.

Example: A municipality issues a bond with an 8 year term which pays out coupons at the rate of 1% interest per annum during the first 4 years and at the rate of 3% interest per annum during the second 4 years. The bond includes a canary call clause which allows bondholders to terminate it within the initial 4-year term during which the lower interest rate applies. Bondholders who do not terminate the bond within the first 4 years must keep the bond for the full 8-year term.

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