Are Bonds Refundable:
Non Refundable Bonds are bonds that are not redeemable for a specific period of time. The proceeds are used to issue refunding and financing. You can still call in the bond without refunding but the issuing company has to use equity funds or internal issues before the bond can be retired. This helps protect the holder of Bonds in the instance interest rates sharply decline.
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Non-Refundable Bonds (NRB) can go up and down depending on the circumstances and even if they are not refundable they can be refunded. Numerous investors believed they were locked into the higher rates stemming from the 1980s yet have been paid off at an earlier date than expected. When the issuer of Non-Refundable Bonds has retained their rights to pay off their investors early due to declining rates this does occur.
Investors often become upset because they have to reinvest the money they believed was already invested and because they believe the issuers of the NRB have used the fine print to escape their obligations. The language used regarding bonds can be difficult for most individuals to understand.
Wall Street has a term referred to as clean funds which refer to the early payoff of these bonds. Money taken out of corporate accounts or earned on the stock market is sometimes used to float a new debt while securing a lower rate of interest. The problem is sometimes these funds are clean but they are often dirty. In one specific instance, a department store attempted to redeem bonds at over ten percent in interest while simultaneously issuing bonds at a rate of 8 3/8 percent for thirty years.
Although it is impossible for any investor to protect themselves from every possibility regarding bond redemption they can improve the odds in cases where the issuer is trying to refinance. Demanding a final copy of the issuer’s prospectus from your broker is a good start since many of the issuers in the preliminary stages do not have all of the details.
When an investor in Non Refundable Bonds feels their broker has misled them they have the right to request an arbitration hearing. These hearings are conducted at one of the stock exchanges in the nation. There was an investor who pursued this route and requested anonymity because his bonds were called in early. The brokerage firm blocked him in court. The firm argued that although the bonds were for twenty years and the investor had only had them for ten, arbitration proceedings had a statute of limitations of seven years. The firm stated the limitations had expired.
I hope this was helpful.
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