Optional Redemption
A common form of redemption that gives the issuer the right to retire all or part of the bonds before their maturity dates.
Bond-Basics
Redemption
Repayment of the Bonds prior to their Maturity Date. Whenever Bonds are to be redeemed, a notice must be published and/or mailed to bondholders to notify the bondholders that their Bonds are about to be redeemed. The contents of the Redemption notice, whether it must be mailed and/or published, the timing of the notice, the Principal amount of the Bonds and specific maturities of the Bonds being redeemed and other relevant information are included in the Bond form and the Indenture or Bond Resolution. The Issuer may have to pay a Premium in order to redeem the Bonds in certain cases, and in such cases, typically, the earlier the Bonds are redeemed, the higher the Premium.
Types of Redemption
Mandatory Sinking Fund Redemption
A type of redemption that applies specifically to bonds issued as term bonds provided in the bond resolution/ordinance and/or an indenture, pursuant to which an issuer or a conduit borrower is required to retire a specific amount of the outstanding principal of the term bond by redemption on specific dates.
Extraordinary Mandatory Redemption
Redemption of the bonds in the case of certain unexpected or one-time events occurring with respect to the bonds or the project financed with the proceeds of the bonds.
Note: When Preparing the Bonds
It is important that the Redemption terms of the Bonds (Optional Redemption, Mandatory Sinking Fund Redemption and Extraordinary Mandatory Redemption) are included in the text of the Bond (i.e., the bond form) and are consistent with the Indenture or Bond Resolution and the final Offering Document. The Bond form and the Indenture or Bond Resolution will usually contain the provisions that relate to the giving of notice of Redemption, including the content of notice to bondholders, method of notice delivery, timing of notice and other relevant information.
The Redemption provisions of the Bonds usually contain dates and amounts that are not determined until Pricing. Accordingly, they are often left blank or are accompanied with an asterisk in the preliminary Offering Document. It is very important that the terms of Redemption in the Indenture or Bond Resolution are consistent with the final Bond form and the final Offering Document.
See Also
Principal
The face amount or par amount of a bond, not including interest, payable on its maturity date.
Maturity Date
The date upon which the principal of a bond becomes due and payable to the bond owner.
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Guaranteed Investment Contract (GIC)
An investment agreement offered by financial institutions (e.g., banks or insurance companies) which pays a stated rate of return on invested bond proceeds for a stated term.