Retractable Bond

A retractable bond is a type of bond which can be terminated and cashed out at face value at one or more intervals throughout the bond term.

When an investor exercises their retractable bond option and terminates their bond contracts, the issuer must pay out the face value of the bonds. The investor forfeits any coupon payments due from the point at which they terminate the bonds.

Example: An investor buys 10,000 Swiss francs worth of retractable bonds. The bonds pay 1% interest per annum and have a 10-year term. 4 years into the bond term, the interest environment improves and bonds with 2% interest per annum become available. To take advantage of the higher interest paid by other available bonds, the investor exercises their right to withdraw from the retractable bond contract. The company which issues the bonds repays the 10,000 francs which they borrowed from the investor. From that point on, the company is not required to make additional interest payments.

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