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What Is Redemption?

In the banking and business realm, the phrase redemption has many meanings depending on the context. Repayment of any fixed-income security at or before the asset’s maturity date is known as redemption in finance. Bonds are the most prevalent fixed-income investment. Certificates of deposit (CDs), Treasury notes (T-notes), and preferred shares are other options.

Another application of the phrase redemption is in the context of coupons and gift cards. Consumers may use these to purchase goods and services.

Deeper Definition

Investors may experience capital gains or losses as a result of redemptions. Investors in fixed-income products, such as bonds, get fixed interest payments on a regular basis. Bonds can be redeemed before or on the day of maturity. An investor receives the bond’s par value (also known as the face value) if it is redeemed at maturity. Face value refers to the bond’s initial face value when it was first issued and is the amount of money the bond’s issuer pledges to return the bondholder.

The majority of redemptions are for cash. When a mutual fund investor seeks redemption, the fund management firm will send the investor a check for the market value of the shares. However, in some situations, redemptions may be done in kind.

Redemption Example

1. In-Kind Redemptions: Non-monetary payments for securities or other instruments are known as in-kind redemptions. In-kind redemptions, which are uncommon in the mutual fund business, are prevalent with exchange-traded funds (ETFs).

2. Mutual Fund Redemptions: Fund shares must be redeemed from a mutual fund firm within seven days of receiving a redemption request from an investor. Because mutual funds are only priced once each day, investors who want to redeem their money must make their order before the market closes or the mutual fund’s predetermined time. Money is redeemed at the fund’s net asset value (NAV) for the day, which is determined as the total of a fund’s assets fewer liabilities. Clients usually get their monies, including any profits, through cheque or direct transfer to their bank account once the transaction is finished.

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