Legal Definitions - redeemable security

A redeemable security is a type of financial asset, such as a bond or certain shares of stock, that the entity which issued it has the right to buy back from the investor who holds it. This repurchase typically occurs under specific conditions, such as after a certain date, at a predetermined price, or if certain events occur. The issuer might choose to redeem a security to reduce debt, take advantage of lower interest rates, or simplify its financial structure.

• Example 1: Corporate Bonds

  Imagine "Global Logistics Corp." issues bonds to raise capital, promising investors a 6% annual interest rate over ten years. However, the bond agreement includes a clause stating that Global Logistics Corp. has the option to "call" or redeem these bonds after five years if market interest rates significantly decline.

  Explanation: These bonds are redeemable securities because Global Logistics Corp., the issuer, has the contractual right to buy them back from investors before their original ten-year maturity. If interest rates drop, the company could redeem the 6% bonds and issue new ones at a lower rate, saving on interest payments.

• Example 2: Preferred Stock

  "Innovate Tech Solutions," a growing company, issues redeemable preferred stock to early investors. This stock pays a fixed dividend annually. The company includes a provision that allows it to repurchase these shares at a set price after seven years.

  Explanation: This preferred stock is a redeemable security because Innovate Tech Solutions, the issuer, can buy back these shares from the investors after the specified period. This might be done to eliminate the fixed dividend obligation or to simplify the company's ownership structure as it matures.