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

Related Articles
  1. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  2. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  3. Investing

    Why Bad Bonds Get Good Ratings

    Credit ratings are not the only tool to rely on when assessing bonds. Find out why they sometimes fall short.
  4. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  5. Investing

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  6. Investing

    A Guide to High Yield Corporate Bonds

    The universe of corporate high yield bonds encompasses multiple different types and structures.
  7. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  8. Investing

    Callable Bonds: Leading A Double Life

    Find out more about these dangerous and exciting cousins to regular bonds.
Frequently Asked Questions
  1. Why is social responsibility important to a business?

    Take social responsibility seriously, and your business could benefit from happier, more productive staff members while helping ...
  2. Which socially responsible retailers appeal most to ethical investors?

    Learn why ethical investors have many options in the retail sector, and discover which retail companies are most popular ...
  3. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  4. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
Trading Center