Mandatory Redemption Schedule
What Is a Mandatory Redemption Schedule?
A mandatory redemption schedule requires the issuer set to the side funds to reclaim all, or a portion, of the outstanding bonds by the scheduled dates, which generally goes before the maturity date.
Understanding Mandatory Redemption Schedules
The mandatory redemption schedule states the predefined dates when the call, or prepayment, provisions of the bond contract must be initiated. A call provision permits the issuer to recover their bonds right on time at a set price. Redemption of a bond can be optional or mandatory. A bond with a mandatory redemption schedule has a more modest duration than a bond, with a comparable maturity, that can't be recovered prior to maturity, similar to a bullet bond.
With an optional redemption, the issuer has the option of buying back the bonds from investors on determined call dates listed in the trust indenture. Mandatory redemption is a call provision that requires an issuer to recover bonds before their stated maturity date. Each term bond has its own mandatory redemption schedule set out in the original bond agreement.
Mandatory redemption schedules are valuable for overseeing cash flows for mandatory calls. A few types of mandatory redemptions happen either on a scheduled basis, or when a predetermined amount of money is accessible in the sinking fund. The sinking fund is the annual reserve where an issuer is required to put aside periodic installments that will be utilized to pay the costs of calling bonds as per the mandatory redemption schedule in the bond contract or to purchase bonds in the open market. A mandatory redemption schedule might require the issuer to reclaim bonds a decade from the issue date, for instance.
Special Considerations
Bonds might be reclaimed at a predetermined price, as a rule at par, and the bondholder will receive any accrued interest to the redemption date. Redemption could either be full or partial. Where a particular maturity of an issue is subject to partial redemption, the specific bonds to be reclaimed might be chosen by parcel in mathematical order. Extraordinary events might trigger mandatory redemption. If an unusual situation happens which influences the source of revenue used to service the debt, the issuer will be required to reclaim the bonds.
For instance, a revenue bond might be issued to fund an airport. The revenue created from airport fees and taxes will be utilized to service the debt. Nonetheless, on the off chance that an adverse event happens in which the airport becomes inoperable, cash inflow will be nonexistent. In this case, the issuer will not be able to keep servicing the debt and may decide to trigger the extraordinary redemption clause.
Features
- A mandatory redemption schedule can likewise determine that redemptions must happen in view of the amount of money accessible in the sinking fund.
- Bonds with mandatory redemption schedules have a more modest duration than bonds that can't be recovered prior to maturity.
- Mandatory redemption schedules command a bond issuer to recover all or part of the outstanding bonds by the scheduled dates sooner than its maturity.
