Corporations and governments issue bonds to borrow money. When you invest in bonds, you lend money and receive income in the form of regular interest payments. At some point, the bond issuer pays back the borrowed money to retire the debt. As a bond owner, you get your money back. However, the terms under which bonds can be retired vary and can be a plus or minus for an investor.
Definition of Bond Retirement
Technically, “retirement of bonds” is an accounting term that you’ll see used on financial statements. It refers to a buyback of bonds previously sold. In other words, it means a bond issuer has paid off the debt represented by the bonds. For example, on a company’s cash statement, retirement of bonds may be used to explain a reduction in the firm’s long-term debt.
Each bond has a maturity date – the date on which the debt must be repaid. Bonds have maturities ranging from a few months to 30 years or more. The bond issuer pays investors the par value that is stated on the bond plus any accrued interest to retire the debt. Bond prices can vary considerably during a bond's life. Consequently, when you hold a bond to maturity, it’s likely you’ll have a capital gain if you bought the bond at a discount from the par value. If you purchased a bond at a premium over par, you’ll have a capital loss.
Some bonds are sold with a call provision as part of their terms and conditions. When a bond is callable, it means the bond issuer has the option of paying off the debt and retiring the bond before it matures. Typically, these bonds can be called on or after a specified call date. Corporate and municipal bonds are the most likely to have a call feature. If prevailing interest rates go down, the bond issuer can retire callable bonds and reissue them at a lower interest rate. This works to the advantage of bond issuers, and investors may lose out on favorable interest rates.
Corporations sometimes sell bonds that can be converted into a specific number of common stock shares. If an investor chooses to exercise the conversion option, the debt represented by the bond is retired when the bond is exchanged for stock. This can be a good deal for the bond owner, because she has the opportunity to benefit from growth in the value of the stock and earn income from the bond. Convertible bonds can also benefit the issuing company, because a conversion retires the debt without the firm having to pay out cash.