Fixed Income Investments - Provisions for Redeeming Bonds

The provisions for redeeming bonds are found in the indenture. They can be:

3.Have Prepayment Options and/or
4.Sinking Fund Provisions

1. Call Redemption
By adding a call feature in the indenture, a bond becomes a callable bond. A callable bond gives the issuer the right to redeem the bonds on a stated date or a schedule of dates before the stated maturity date for the bonds arrives.

Let's look at callable bonds in a little more detail. First, some terminology:

  • Call Price - This is the price that the issuer will pay the bondholder; also know as the redemption price.
  • Call Date - This is the date or dates that the issuer can call the bond from the holders.
  • Deferred Call - When a callable bond is originally issued, it is said to have a deferred call of so many years up to the first call date, which is the first day the bond can be called by the issuer.

Redemption Pricing

  • Regular or General Redemption Prices - These price tend to be above par until the first par call date. The price is typically known before the redemption occurs.
  • Special Prices - These occur because of certain events such as sinking funds, repossessions, forced sales, and eminent domain. These usually occur at par value but could be less, depending on the collateral backing the bonds.

Calling Bonds
When callable bonds are called, it can be for the entire issue or for just a part of it. A partial call can be done on a random basis, like picking numbers out of a hat, or on a pro rata basis. A pro rata call allows all holders to redeem a certain percentage of their holdings while with a random, partial call it could be anyone's guess as to which bonds will be called by the issuer.

Price can be determined as a fixed price, regardless of dates, based on a predetermined schedule of dates in which price decreases as it nears the bond's maturity date, as well as through a make whole call.

Example: Call Redemption

Let's use the Stone and Co 12's of 20, or Stone and Co 12% bonds of 2020 to illustrate a scheduled call.

Fixed price regardless of date:
This call provision allows the bond to be called at par plus interest at any date past Jan.1, 2010.

Price based on Schedule.
This call provision bases its price on stated dates with the price decreasing as the bond nears maturity.

Jan 1. 2010 Price = 103 or $1,030 based on a par value of 100

Jan 1. 2012 Price = 102 or $1,020 based on a par value of 100

Jan 1. 2015 Price = 101.5 or $1,015 based on a par value of 100

Price based on a Make-Whole Premium
This structure incorporates various formulas that can be structured to develop the price. The formula is structured to protect the yield the investor had been receiving on his bond.

Related Articles
  1. Personal Finance

    How To Choose A Financial Advisor

    Many advisors display similar skillsets that can make distinguishing between them difficult. The following guidelines can help you better understand their qualifications and services.
  2. Investing

    Asset Manager Ethics: Investment Process and Actions

    Managers, in developing their investment process, need to determine some “general rules” that make it meaningful. We offer six.
  3. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  4. Professionals

    Advisors: Which Certifications Are Essential?

    The right advisor credentials can make all the difference, but wading through some 100 certifications can be a challenge. Here's some help.
  5. Investing Basics

    Asset Manager Ethics: Valuation Is A Tricky Business

    Asset managers must accurately represent all of a clients assets in the client portfolio. This can be tricky for unique and hard-to-value assets.
  6. Personal Finance

    Top 10 Most Valuable Sports Teams in 2015

    Cleats, pads and profits: we take a look at the top 10 most valuable sports teams in the world.
  7. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  8. Personal Finance

    Invest in Costco? First Understand Its Balance Sheet

    A strong balance sheet sets a company apart and boosts investor confidence. How healthy is Costco based on an analysis of its balance sheets from the last two years?
  9. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  10. Professionals

    DCF Vs. Comparables: Which One To Use

    DCF and Comparables models are widely used in equity valuation. We explain the pros and cons of each method.
  1. Personal Financial Advisor

    Professionals who help individuals manage their finances by providing ...
  2. CFA Institute

    Formerly known as the Association for Investment Management and ...
  3. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly ...
  4. Security Analyst

    A financial professional who studies various industries and companies, ...
  1. What are the differences between a Chartered Financial Analyst (CFA) and a Certified ...

    The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>
  2. How do I become a Chartered Financial Analyst (CFA)?

    According to the CFA Institute, a person who holds a CFA charter is not a chartered financial analyst. The CFA Institute ... Read Full Answer >>
  3. What types of positions might a Chartered Financial Analyst (CFA) hold?

    The types of positions that a Chartered Financial Analyst (CFA) is likely to hold include any position that deals with large ... Read Full Answer >>
  4. Who benefits the most from prepaid expenses?

    Prepaid expenses benefit both businesses and individuals. Prepaid expenses are the types of expenses that are bought or paid ... Read Full Answer >>
  5. If I am looking to get an Investment Banking job. What education do employers prefer? ...

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ... Read Full Answer >>
  6. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ... Read Full Answer >>
Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!