Retractable Bond is a bond that has more than one possible maturity date due to an embedded option that can shorten the bond maturity.
- Depending on the issue terms, either an investor or an issuer has the right to advance the return of principal to an earlier date, i.e. the Retractable Bond gives the investor or the issuer the right to, respectively, receive or pay the principal on a date earlier than the original final bond maturity.
- Investors and issuers use the bonds of this type to take advantage of changes in interest market rates.
- If the right to call the bond is vested in the issuer, the issuer will have to pay a higher interest on such bonds than on similar ones, however without the possibility of redemption, to make the bonds more attractive to investors.
A particular case of the Retractable Bond is a Puttable Bond – a type of bond that gives its holder (investor) the right, but not the obligation, to demand early repayment of the principal by the issuer before maturity. In other words, it is a bond with an embedded put option.
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