Redemption has numerous meanings within the finance world.

Basically, it is the repayment of any security at or before the maturity date of that security. Bond is one kind of security. Other than bonds, Treasury notes, certificates of deposit, Preferred shares are a few securities that are issued in the financial market.

Simply, firms that issue bonds or other money securities could opt to pay a redemption price at the time of buyback of their securities before the maturity date.

The redemption value is generally at a premium to the bond face value. Periodic interest payments usually halt before redemption. The redemption value is higher than the bond initial issued value therefore they are termed to be redeemed at a premium price above the par value.

Usually, the deadline for the confirmation of redemption is before the six months of redemption date. The message is generally conveyed via email or call to the bondholder by the issuer to confirm the redemption decision.

In case the redemption deadline is passed then the bond automatically gets eligible for the next interest payment. In order to have the redemption choice issuer needs to wait the next six months of the redemption date.

A redemption bond is also known as a callable bond or redeemable bond. Such provision of call is often featured in corporate bonds and municipal bonds.

The issuer of the bond usually tries to grab this call provision when the prevailing interest rates drop below the interest rate of the bond with an intention to save money by liquidating the bond and issuing another bond at a lower interest rate. Seeking the advantage of the price and interest inverse relationship.

The primary type of call features are:

Optional Redemption -This feature is utilized at the issuer’s discretion. Many municipal bonds have this feature to exercise after certain years, mostly 10 years from issuance.

Sinking Fund Redemption - The issuer redeems a fixed portion or all of the bonds with a fixed schedule.

Extraordinary Redemption -Allow the issuer to decide its bond before maturity bound events occur, like the project for which the bond was issued to finance has been broken or destroyed.

Redemption value is quoted as a percentage of the face value of the bond. For example, the Rs.1000 face value of the bond redeemed at 101 is termed 101% of Rs. 1000 = Rs.1010.