What is exchange value?

The redemption value is the amount an issuer must pay to repurchase some type of collateral before the collateral reaches its maturity date. The idea is to determine what price would allow the issuer to carry out this type of transaction and minimize the loss or even make some kind of profit from the transaction. Bond issues are a common example of investments that can be redeemed sometime before the maturity date.

There is no single way for a company to calculate the redemption value associated with a particular investment. Several factors can come into play, including the amount of time remaining until the bond matures, the benefits to be gained from redeeming the bonds early, and the amount that must be paid to regain control of the bonds. Issuers may choose to redeem bonds early for a variety of reasons, including the chance to save on interest or dividend payments that would apply if investors held the bonds to maturity.

One way to understand redemption value is to consider a bond issue issued by a municipality. The bond is structured to provide investors with periodic interest payments over the ten-year life of the bond. Under the terms of the indenture, the issuer reserves the right to request the obligation at certain times during the life of the obligation, liquidating with investors in accordance with the provisions contained in the indenture. If the issuer is considering redeeming the bond after seven years, it is necessary to assess the price that must be paid to investors, both in terms of principal and any accrued interest due on the bond issuance date. If the issuer determines that this would be in the municipality's best interest and allows it to redeem the bond early, diverting the savings to other efforts on behalf of the jurisdiction, the redemption amount will be deemed acceptable.

Investors should also consider the residual value of investments before making a purchase. Doing so makes it easier to determine the level of return that will be achieved if the issuer wants to redeem the instrument before the agreed maturity date. If the first redemption opportunity does not produce a return that the investor considers reasonable, the investor is likely to forego the opportunity and pursue investments that are more likely to produce the desired level of return.