Corporate Bond Redemption 

To reduce or refinance their outstanding corporate bonds obligations — particularly when interest rates decline — corporations may retire or “call away” corporate bonds prior to the corporate bonds' maturity.

It is important that you find out the potential bond redemption provisions of a corporate bond before investing in the corporate bond.

The following are the most common types of corporate bond redemption methods:

The Call - the first type of bond redemption

Many corporate bonds are issued with call features, enabling a company to call or retire a corporate bond at specific dates and prices, prior to maturity. To compensate for this potential early redemption, callable corporate bonds typically offer corporate bond holders higher yields, and a call premium, as opposed to non-callable corporate bonds.

Corporate bonds are generally callable at par plus a “premium” (the specified amount over par that a holder receives). This premium amount gradually declines to par (face amount) as the corporate bond reaches maturity.

Refunding - the second type of bond redemption

With refunding, a corporation sells a new corporate bond issue, then uses the proceeds from the sale to retire an outstanding corporate bonds issue. As a corporate bond holder you are generally protected from refunding for a set period of time, usually five or 10 years, depending on the type of issue and its maturity date.

Sinking Fund - the final type of bond redemption

A sinking fund provision requires a corporation to retire a certain percentage of a corporate bond issue annually, at random — regardless of where interest rates are — until the entire issue is retired.

Like other bond redemption methods, sinking funds typically provide corporate bond holders with a specified protection period before the issuer can begin retiring the corporate bonds.