The refunding of an issue is the replacement of a current high coupon rate bond. This is done by issuing newer bonds at a lower coupon rate. With regards to a callable issue, refunding offers little protection to a holder. At least with a callable bond the holder has a date on which the call will occur. The refunding could occur as soon as it becomes advantageous to the issuer to replace older, higher rate bonds.
This form of redemption occurs in ABS and MBS securities. In this instance the investor could receive additional principal payments before the maturity date. For example, a homeowner with a mortgage payment of $500 a month could pay more than that amount, say $700 a month. This additional $200 would constitute a prepayment of principal. If this were to happen in the payment of a bond, the bond would be redeemed before maturity.
4. Sinking Fund Provisions
This helps redeem and retire bonds. It requires an issuer to retire or pay for the retirement of a specific portion of the issue at certain times. This helps reduce credit risk by having something in the "kitty" each year as a protection against a default. It can be structured to retire the entire issue at its maturity date or only a portion of the balance of the issue. If provision is only for a balance of the issue, the final payment is paid by a balloon payment.
TaxesDon't panic. There are a number of reasons your refund might be delayed – and solutions for each.
InvestingLearn why early redemption occurs and how to avoid potential losses.
InvestingCallable bonds can leave investors with a pile of cash in a low-interest market. Find out what you can do about it.
InvestingLearn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
InvestingFind out more about these dangerous and exciting cousins to regular bonds.
Financial AdvisorMost of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
InvestingA sinking fund is a way for companies to pay off part of their bond issue before it reaches maturity. By eliminating its debt gradually, the bond issuer is more likely to attract investors concerned ...