Redeemable

The term redeemable may mean:

  • That a security has a maturity date on which the principal will be repaid and the security will be cancelled.
  • That a security is redeemable at the option of the holder — the holder can require the issuer to redeem before maturity.
  • That the security is redeemable at the option of the issuer — the issuer can choose to redeem before maturity.

The first of these is easily understood.

If a security is redeemable at the option of the holder, this effectively gives the holder a put option written by the issuer.

If a security is redeemable at the option of the issuer, then the issuer effectively has a call option on the security written by the holder. These bonds are therefore sometimes described as callable.

Any security may be redeemed by the issuer purchasing it in the market and then cancelling it. The difference between this and a security redeemable at the option of the issuer is that the issuer can get rid of its liability to the holder of the security at a rate other than the market price.

This means that the valuation of redeemable (in this sense) securities is complicated by the value of the embedded option. The option may only be exercisable under certain conditions, which further complicates valuation.

The value of a security redeemable at the option of the issuer is the value the security would have if it were not redeemable, less the value of the call option the issuer holds on it.

The value of a security redeemable at the option of the holder is the value the security would have if not redeemable plus the value of the embedded put option.

Redeemable bonds

When a corporate bond is referred to as redeemable it usually means that it is redeemable at the option of the issuer (callable). The term redeemable is rarely used to simply indicate that a coporate bond has a fixed maturity, because that can usually be assumed.

A callable bond is worth less than any bond (that is the same in other respects) with a fixed maturity date at any point between the earliest date on which it can be called and the latest possible date for repayment.

An interesting variant on this are reverse convertibles which give the issuer a put option.

Because of the existence of perpetual government bonds the term redeemable can mean that they have a fixed maturity, however gilts redeemable at the option of the issuer also exist, so the reference may be to those.

Redeemable prefs

Redeemable prefs have a fixed life, and will mature like a bond. This means they are even more bond like than other prefs — they pay a fixed amount of interest for a fixed number of years, followed by a repayment of principal.

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