Mandatory corporate actions for bonds

Interest (coupon) payments are among the most common ones. In the United States, bonds typically have semiannual interest payments based on fixed coupon rates. For example, if coupon is 6% of par value, and par of 100 represents $1,000, then there will be two semiannual payments in a given year of $30 each. 

Final redemption is when at bond’s maturity the principal is returned to investors. Typically, the principal amount is $1,000 but it can differ for some issues. If investors buy a bond after it was issued, the market price is often different from the par value. For example, an investor can buy a bond for 97, which represents $970 for $1,000 bonds. Then, at maturity, the bond will still be redeemed at $1,000. Also, if an investor buys the bond at 102 ($1,020), at redemption $1,000 will be returned.

For partial redemptions, only some bonds are redeemed. This often applies to callable bonds. This selection can happen through a lottery drawing.

At times, convertible bonds get converted into stocks. This can happen at the choosing of a company (so then it’s a mandatory event) or at the option of investors (a voluntary event). Investors would convert their options when it is advantageous to do so. For example, if a $1,000 bond can be converted to 50 shares of a stock which is $20 a share, and that stock trades well above $20, then many investors would choose the conversion option.

Voluntary corporate actions for bonds

If there’s a tender offer for bonds, investors can offer their bonds in return for cash. Let’s say bonds were issued at $1,000, but their current value in the market is $920. (This can happen if interest rates went up significantly and/or when the credit rating deteriorated). In such situations, a buyer (which could be an issuer or someone else such as a fund buying distressed securities) offers to buy bonds. To encourage sellers, a price above the current market price could be offered.

Another voluntary corporate action would be an exchange offer where bondholders are offered to exchange their bonds for some other security such as a stock of the issuer.


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Bond investors need to understand corporate actions well

Fixed-income Corporate Actions

​​When it comes to corporate actions for fixed-income products, such as bonds, there are both mandatory and voluntary events.