Interest rates are always changing, so a company that issues a bond will usually insert a provision that allows it to pay off some or all of its debt prior to the bond's maturity date. This provision is triggered when rates decline and the issuer can borrow at a more favorable rate.

There are at least three bond redemption mechanisms available:

  1. Call feature: Grants the issuer the right to buy back all or part of an issue prior to the maturity date; callable bonds might also feature call protection, which stipulates that bonds may not be called for a specific initial period, usually two or three years.

  2. Sinking fund call: On either a mandatory or an optional basis, the issuer deposits money in a fund designated for redeeming outstanding bonds. If the sinking fund is mandatory, then certain principal amounts must be redeemed annually on specified dates. If the fund is optional, redemption takes place at the discretion of the issuer.

  3. Refunding: When a company issues a bond in order to pay off a previously existing bond issue.
Bond Ratings

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