A Fascinating Behind-the-Scenes Look at Company Retire Bonds

A company may retire bonds by all but which of the following means?

1. Declining interest –

The company may decline to pay its interest if it doesn’t have the cash flow to keep up with the interest payments. 

This is different from “forgetting interests”, which means the company just forgets to pay it.

2. Accrual –

The company has accrued its interest on debt that is due in future, or there are accrued interests that have not been paid to bondholders, who will be forced to accrue them until they are paid.

3. Compound –

This means the company pays the current interest plus some extra amount to match accrued interests since last payment (or longer if needed).

 Bonds may not have a long time period so this may be impossible if the company is having financial difficulties even before they issue new bonds.

4. Convertible –

This is the process of changing bonds from one type to another. Convertible bonds are a type of corporate bonds that can be converted into common stock of the company if certain conditions have been met.

5. Extendable –

This means the company is extending the maturity date of its bonds, which means taking time to pay back their cash debts. 

This strategy is commonly used when a company knows that they will not be able to pay all the interest by their due dates and it will become necessary to borrow more money or issue new debt instruments in order to stay afloat. 

The idea behind this strategy is that by extending the maturity dates, companies hope that their profits will increase in future and they will then be able to easily cover all due amounts for interest payments as well as repayments for other debts. 

This may be a strategy that looks good on paper but in reality the situation may not improve even after maturity is extended. 

If a company is struggling with their debt payments, they should try to solve the issue as early as possible instead of prolonging it.

6. Forfeit –

This means the bond issuer admits that they are unable to pay interest, either due to insufficient profits or losses, and all or part of principal will not be repaid, which means bond holders don’t get all their money back. 

This usually occurs when a company has been facing bad financial conditions for many years and the financial condition for future is not expected to change much either.

7. Forgo –

This is similar to “forgive”, because the company has decided not to make any interest payments in a given period, which means bond holders don’t get any interest even though they have worked hard and done their duties as bond holders. 

There are some companies that have strong brand recognition and therefore, when there are smaller fluctuations in the market, these companies can keep on borrowing money from investors at low cost and make a good amount of profit for themselves.

 They can then use this profit to pay back all the interest for both current and previous bonds that were issued earlier.

8. Grace –

This means the company has offered bond holders a period of time so they can restructure their debt, so that they are able to pay off their debts in shorter terms. 

This period of time is called the “grace period” because bondholders can use this opportunity to reorganize their financial status, and then pay off their bond debt in a shorter term, with less interest costs.

 The grace period usually lasts for four months to one year. If the bond issuer does not use this time wisely and pay all the due amounts before the grace period expires, then it won’t be possible for them to have a grace period any more.

9. Impatience –

This is a strategy that allows the bond issuer to create new bonds in order to pay off old ones. 

By doing this, the bond issuer will be able to cover their due interest payments more easily by using this strategy. 

Making new bonds that have lower maturity periods may also help restore credibility of bond issuers with investors because it shows how serious the company is and is willing to pay everything that they owe, including earlier deferred interest amounts.

10. Impose –

This means the company is imposing a deadline for bond holders to decide whether they want to convert their bonds into shares of the company or not (in case convertible bonds).

 This deadline may be implemented once the bond maturity date is near, or it can also be implemented when there are uncertainties in the global financial markets and investors want to withdraw their investments.