What Is a Redemption Notice?

When an issuer redeems a security, it pays security holders the face value and any remaining interest or dividends. Bonds and other forms of debt can mature after periods ranging from under a year to 30 years or more. Normally, a bond issuer makes the final interest payment on the maturity date. A corporation that issues redeemable, or “retractable,” preferred stock may pay a final dividend on the redemption date. A security is cancelled on its redemption date, meaning it no longer trades and receives no further interest or dividend payments.

You, or more likely your broker, will receive a redemption notice shortly before the redemption date. It lists the issuer, security identifier, redemption date, amount and any series or registration numbers. The notice explains where to present the securities for redemption. Part of your broker’s job is to routinely handle redemption notices, so it is unlikely you will ever receive one. However, if you purchase bonds directly from the U.S. Treasury or preferred stock from a dividend reinvestment plan, you might find a redemption notice in your mailbox.

Many issuers include a call provision in the securities they offer. A call provision gives the issuer the right, but not obligation, to redeem the securities on or after the call date for a set amount of money known as the call price. Normally, the call price is equal to or slightly higher than the security’s face value. Although all securities are redeemed at maturity, the issuer may choose to make a partial early redemption. Investors dislike call securities because a call interrupts the stream of interest or dividend payments. Also, investors lose any amount by which the security’s price exceeds the call price.

Even if a security has no call provisions, it might face early redemption through a buyback. In this procedure, the issuer enters the marketplace -- the stock or bond exchange -- and buys shares or bonds. The issuer may then retain the purchased securities in its treasury or cancel them. The issuer may set up a sinking fund to pay for calls and buybacks. A sinking fund is money put aside for a specific purpose, such as security redemption. Normally, issuers use sinking funds to redeem securities in annual installments until the maturity date.