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Principles of finance a la shmoop... Redeeming bonds, Robert Downey jr, Paula [Robert Downey Jr and Paula Abdul walking out of rehab]

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Abdul, Shawshank Redemption well Redemption is the paying off of a

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debt the principle that was originally borrowed you borrowed the money you paid

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the interest on it for awhile and then you paid it off you redeemed yourself

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from your shameful need of having to borrow money or take on debt that's more

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or less where the term came from anyway we've highlighted the value

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of a sinking fund created so that redemption is oh so much easier the idea

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is to set things up so that the heavy load of debt on the corporate ship can [Ship carrying debt sailing in the ocean]

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be sunk along the way without violent financial shock when the full amount of

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the loan is you know suddenly due and corporate CFOs are always on the lookout [Person looking through binoculars at store closing sale]

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for a deal it's their job....Joe Bob Billy has a billion dollars par value of nine

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percent coupon bonds which were issued in a much tougher credit market than

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exists today those bonds now trade for a hundred seventeen cents on the dollar or

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a 17 percent premium to par they are callable next quarter at 103 meaning

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that there is a three percent premium to call the bonds but the modern you, hello

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are told that you can refinance everything for a coupon of about five [Mr Joe Bob Billy's e-mail to refinaince coupon of 5.5%]

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and a half percent the savings of three point five percent Interest per year

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that's that nine percent minus the five point five percent on that amount of

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money is worth the hassle and fees of doing it so you pay the 103 or three

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percent premium to call all the bonds ie you buy them back and we'll simply issue

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new debt at the lower price and save your company a ton of interest costs

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that process is called refunding you funded this company wants with the nine

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percent money now you're just doing it again with five and a half percent money [Joe holding 5.5% coupon bond]

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and if the markets were really liquid and forgiving well then you that

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crackerjack CFO might pre-refund that is before your bonds are even callable

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you'd issue new cheap debt so that the money is already in place for you when

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your bonds are in fact callable.. rates might have

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for a month dipped below 5% and it's worth the fifty basis points spread for [Coins falling]

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a few quarters to pay that extra interest just to lock in the ultra cheap

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low rate and have no more market risk in going out for loans when it actually

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needs to happen like when you actually need the money rather than just want it

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