Extraordinary Redemption: Definition & Meaning | Bondfish
Extraordinary redemption is the early repayment of a bond triggered by a specific unusual event named in the bond documents — such as the destruction of the financed project, a loss of tax-exempt status or the cut of a government subsidy — rather than by the passage of time or the issuer’s ordinary call right.
What extraordinary redemption means
Most callable bonds can be repaid early on scheduled call dates at a stated call price: that is an optional redemption, exercised at the issuer’s discretion. An extraordinary redemption (also called an extraordinary call) is different. The Municipal Securities Rulemaking Board defines it as a redemption “triggered by an event or occurrence other than the passage of time or an issuer’s election.” The clause sits in the indenture or official statement and spells out exactly which events count.
Common triggers include a catastrophe call after the facility backing a revenue bond is destroyed or condemned; a change-in-use call when a project is used in a way that could make a tax-exempt bond taxable; unspent bond proceeds returned to investors; or, for direct-payment bonds such as Build America Bonds, a reduction in the federal interest subsidy. Depending on the wording, the redemption may be mandatory (the issuer must repay) or extraordinary optional (the issuer may repay if the event occurs).
The redemption price is usually par plus accrued interest, sometimes with a small premium. Unlike a make-whole call, it rarely compensates investors for lost future coupons.
Why it matters for bond investors
Extraordinary redemption is a form of call risk that ordinary yield calculations can miss. If you bought a bond above par, a par redemption returns less than you paid. Fidelity warns that the extraordinary redemption price “may be less than the price paid to purchase the direct-payment bonds and/or recent trade prices.” Because the trigger is an event rather than a date, yield to worst does not capture it: a bond quoted at a comfortable yield to call can still be redeemed tomorrow at 100.
The defence is to read the redemption section of the prospectus or official statement before paying a premium price, and to treat bonds with broad extraordinary-call language as if they could be repaid at par at any time.
Example
Bond bought at 106.50 (coupon 5%, 8 years to maturity)
Subsidy cut triggers extraordinary redemption at 100.00 + accrued interest
Loss on principal: 106.50 − 100.00 = 6.50 points (about 6.1% of the purchase price)
The 5% coupon that justified the premium disappears, and the investor must reinvest the proceeds at whatever rates prevail at the time.
Related terms
Further reading: Premium vs discount bonds explained.
Sources: MSRB Glossary — Extraordinary call or redemption; MSRB — Refundings and Redemption Provisions; Fidelity — Call/Early Redemption Risk for Direct-Payment Municipal Bonds.
This definition is for general information only and is not investment advice. Bond investing involves risk, including possible loss of principal.