# Why is the redemption value of a bond usually higher than the initial price of that bond?

I understand the redemption value of a bond to be the price an issuer of a bond has to pay in order to redeem a bond before its maturation.

I also understand that the owner of the bond can redeem a bond too, which confuses me.

Is it that there is a set redemption value of a bond, i.e., \$1200 for a bond that was initially priced at \$1000, and the bond can be redeemed by the issuer if it's callable or if the owner agrees to redeem it (if not callable), or it can be redeemed by the owner if the owner deems it advantageous but in this case the issuer would also have to agree to redeem it. (does the issuer have to agree?)

Basically, if the redemption value of a bond is higher than the initial price was to purchase it, why wouldn't people just buy an endless amount of bonds and sell them at a markup?

I know there's something I'm missing, and if anyone can help that would be greatly appreciated.

Thank you very much

• "I also understand that the owner of the bond can redeem a bond too, which confuses me." Why does it confuse you that a borrower can pay his debt early? (After all, you can pay your car loan and mortgage early, so why can't businesses pay off their loans early? Commented Jun 8, 2021 at 4:18
• You are assuming you can sell them for higher, say \$1100. But if the company (who probably did more research on this than you) thought there was a market for \$1100-bonds, they would be selling them for \$1100 themselves. (This is an oversimplification, of course.) Commented Jun 8, 2021 at 14:12

I understand the redemption value of a bond to be the price an issuer of a bond has to pay in order to redeem a bond before its maturation.

No, the redemption value is the amount that the holder of the bond gets at maturity.

If the bond is callable, the issuer can "buy back" the bond from bond holders at some specified call price, typically the par (redemption) value, but not always. Sometimes bonds have a call value above par (or below). Callable bonds are less common, since callable bonds are less valuable to bond holders (meaning less money to the issuer), and increase risk to the holders.

Issuers also do not call bonds that are trading below the call price, since they could buy them back on the open market for less than the call price (or, more realistically, just forego the call option and keep the bonds until maturity).

I also understand that the owner of the bond can redeem a bond too, which confuses me.

Only if the bond is putable which is even more rare, because it increases the risk to the issuer (and makes bonds more valuable to the holder). Putable bonds do not typically trade very much below their put price for the scenario you outlined (hold the bond and sell it at par).

If you buy a corporate bond with no optionality, you should expect to either 1) hold the bond until maturity, which will yield some gain over the coupon rate if you buy it below par, but it may take many years, so the annual gain is smaller, or 2) expect the bond to increase in value and sell it for a profit, usually because the credit rating of the issuer is bad and you expect it to get better.

Basically, if the redemption value of a bond is higher than the initial price was to purchase it, why wouldn't people just buy an endless amount of bonds and sell them at a markup?

Because your supposition is incorrect. A bond's call price is it's face value.

https://www.investopedia.com/terms/c/callprice.asp

Because the call price (aka redemption value, and relevant only if bonds are called -- paid off early) is fixed at issuance.

OTOH, your question implies that the redemption value is the current market price.

Just as importantly, the company wants you to buy the bonds, and they will only call the bonds if it's advantageous for them to do so.

• I think the discrepancy was that I assumed the owner of a bond could redeem it for the redemption value but I know now that only the issuer can redeem it. But, when you say that a bond's call price is its face value, wouldn't that be wrong? Or is there a difference between call price and the redemption value? I thought issuers exercise their call in order to redeem the bond before it matures at the redemption value. Commented Jun 8, 2021 at 7:44
• @BradleyMiller turns out I was wrong: investopedia.com/terms/c/callprice.asp Commented Jun 8, 2021 at 12:30