DEFINITION of 'Mandatory Redemption Schedule'

The mandatory redemption schedule includes specified dates when a bond issuer is required to redeem all or a portion of the outstanding issues of a bond prior to its maturity. The issuer might be required to redeem all or a portion of the bonds according to the call or prepayment provisions of the bond contract.

BREAKING DOWN 'Mandatory Redemption Schedule'

A call provision allows the issuer to redeem its bonds early at a set price. Redemption of a bond can be optional or mandatory. With an optional redemption, the issuer has the option of buying back the bonds from investors on specified call dates listed in the trust indenture. Mandatory redemption is a call provision that requires an issuer to redeem bonds before their stated maturity date. Each term bond has its own mandatory redemption schedule set put in the original bond agreement.

Mandatory redemption schedules are useful for managing cash flows for mandatory calls. Some types of mandatory redemptions occur either on a scheduled basis, or when a specified amount of money is available in the sinking fund. The sinking fund is the annual reserve in which an issuer is required to make periodic deposits that will be used to pay the costs of calling bonds in accordance with the mandatory redemption schedule in the bond contract or to purchase bonds in the open market. A mandatory redemption schedule may require the issuer to redeem bonds ten years from the issue date, for example.

Bonds may be redeemed at a specified price, usually at par, and the bondholder will receive any accrued interest to the redemption date. Redemption could either be full or partial. Where a particular maturity of an issue is subject to partial redemption, the specific bonds to be redeemed may be selected by lot in numerical order. Extraordinary events may trigger mandatory redemption. In the event that an unusual circumstance occurs which affects the source of revenue used to service the debt, the issuer will be required to redeem the bonds. For example, a revenue bond may be issued to fund an airport. The revenue generated from airport fees and taxes will be used to service the debt. However, if an adverse event occurs in which the airport becomes inoperable, cash inflow will be nonexistent. In this case, the issuer will be unable to continue servicing the debt, and may choose to trigger the extraordinary redemption clause.

A bond with a mandatory redemption schedule has a smaller duration than a bullet bond – a bond that cannot be redeemed prior to maturity – with a similar maturity.

  1. Extraordinary Redemption

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  2. Partial Redemption

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  3. Call Date

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  4. American Callable Bond

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  5. Call Price

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  6. Put Bond

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