How to Call a Percentage of Bonds at a Premium

by Mike Parker

Bonds represent a form of financing for both public and private enterprises. There are three primary types of bonds, which are dependent upon the type of organization that issued them: government bonds, municipal bonds and corporate bonds. A bond represents a loan from the investor to the bond issuer. The issuer agrees to repay the face amount of the loan upon maturity of the bond plus period interest. In some cases, the issuer may redeem some or all of the bonds early by issuing a call on the bonds.

1. Determine whether current market conditions make it advisable or advantageous to call in a percentage of your bonds. Market conditions that may warrant the early redemption of a percentage of your company's bond debt may include a drop in prevailing interest rates or an extraordinary circumstance that prevents funds earmarked from the bond sale proceeds to be used for that purpose. Certain provisions of the bond indenture may require the redemption of a percentage of outstanding bonds.

2. Check the bond indenture and the prospectus for any provisions for calling a percentage of the company's outstanding bonds. You may only issue a call if the bond indenture and prospectus detail the circumstances under which such a call may be made. Some bonds are not callable. Call provisions may be triggered after the bond has been issued for a specified period of time -- five or 10 years, for example. The bond indenture and prospectus may call for the orderly redemption of a percentage of the company's outstanding bonds at regular intervals through a sinking fund provision. Bonds that are called early may have a provision for redemption at face value or at a premium, depending on the provisions stipulated in the bond indenture and prospectus. Redeeming called bonds at a premium helps compensate the bond holder for lost interest.

3. Determine the percentage of bonds to be called, and issue the bond call through the bond's issuer or administrator. Called bonds are typically selected at random. Since bond ownership is typically registered, you must notify the holders of the called bonds at their registered address. The bond will cease paying interest as of the call date. It is the bond holder's responsibility to redeem her bond through her investment broker or directly with the bond's issuer or administrator.

Items you will need

  • Bond Indenture
  • Bond Prospectus

Photo Credits

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