Redemption features

Redemption features of a bond refer to the conditions under which a bond can be repaid or redeemed by the issuer before its maturity date. Some common redemption features of a bond include:

A call provision is a feature included in some bonds that gives the issuer the option to redeem or “call” the bond prior to its maturity date at a specified price (known as the “call price”) on certain dates (known as “call dates”).   This feature allows the issuer to potentially refinance their debt at a lower interest rate if interest rates fall or if the issuer’s creditworthiness improves. The issuer can then issue new bonds at a lower interest rate, which can save them money on interest payments. The call price is generally set at a premium to the face value of the bond, and the call dates are usually set at regular intervals, such as every five years.

 It’s important to note that call provisions can be disadvantageous to bondholders because they may have to give up the bond before they expected and may not be able to reinvest the proceeds into a bond with a similar yield.

A put provision is a feature included in some bonds that gives the bondholder the option to sell the bond back to the issuer at a specified price (known as the “put price”) on certain dates (known as “put dates”).   This feature allows the bondholder to potentially receive their principal investment back earlier than the bond’s maturity date, which can be beneficial if interest rates rise or if the issuer’s creditworthiness deteriorates. The issuer, in turn, may have to buy back the bond at a higher price than it would have to pay at maturity, which makes it a more expensive form of financing. The put price is generally set at a premium to the face value of the bond, and the put dates are usually set at regular intervals, such as every five years.

A sinking fund provision requires the issuer to set aside money on a regular basis, such as annually, to redeem a specific number of bonds at a later date (usually at maturity).

This feature provides greater security to bondholders, as the issuer is required to retire a certain portion of the bond issue.

An open-end provision allows the issuer to redeem the bond at any time at the issuer’s discretion, but usually at a premium over the face value of the bond.