2.7.1. Redemption
You may recall from the SIE that a callable bond is one that permits the issuer to repay the principal early and retire the bond. There are a few more details about callable bonds to know for the 52. An alternate name for callable bonds is redeemable bonds, and calling a bond is also referred to as redeeming the bond. As we will see, not all calls/redemptions work the same.
An optional redemption allows the issuer to redeem the bonds early, at its option, often at a premium. This callable right may only be exercised at specified times, usually after a certain period of years has elapsed. Issuers will generally choose to redeem a callable bond when current interest rates drop below the bond’s coupon rate. Similar to refinancing the mortgage on your house, the issuer will save money by paying off the bond and issuing another bond at a lower interest rate.
With a mandatory redemption, a bond issuer is required to redeem all or a portion of its outstanding issues prior to its maturity. Some types of mandatory re