Bond Retirement

The retirement of bonds refers to the repurchase of bonds from investors that had been previously issued. The issuer retires bonds at the scheduled maturity date of the instruments. Or, if the bonds are callable, the issuer has the option to repurchase the bonds earlier; this is another form of retirement. Once bonds are retired, the issuer eliminates the bonds payable liability on its books.

Retirement of securities refers to the cancellation of stocks or bonds because their issuer has bought them back, or (in the case of bonds) because their maturity date has been reached.

Many securities are routinely bought back by their issuing company such as preferred stocks and corporate bonds. In the case of stock, this reduces the number of shares outstanding. In the case of bonds, it means that the company is essentially paying the investors who bought loaned them money their principal back and getting rid of its debt obligations.

Bond Retirement before Maturity

In some circumstances, the corporation or company wishes to retire all or some of its bonds before the maturity date. This is also called the early retirement of bonds. The main reason for the early retirement is the decreasing of interest significantly in the market. Thus, the issuers wish to replace its high-interest paying bonds with the new low-interest paying bonds.

There are two common ways that the issuers can retire their bonds before the maturity date. These are through the exercise a call option or purchase them through the open market.

Purchase on the open market: In this way, the issuers can retire the bonds early by repurchasing them on the open market. When the issuers repurchase bonds on the open market, they need to pay the bonds at the current price or current market value of the bonds.

Through exercise a call option: In this way, the issuers will need to issue a callable bond that allows them to exercise their right in order to retire the bonds early. In these callable bonds, the issuers reserve the right to exercise the option before the maturity by paying the par value bonds plus a call premium to the bondholders.

Bond Retirement at Maturity

For the retirement at maturity, the corporation issued the bond will need to repay the bondholders the carrying value of the bond. In this case, the carrying value of the bond is always equal to the par value of the bonds regardless of the bond issued at par, at a premium, or a discount.

Therefore, at the maturity date, the principal or par value of the bond will need to remove from the liability account.

Bond Retirement by Conversion

This retirement can be done through conversion. This occurs when a corporation issues convertible bonds that allow the bondholders to convert the bonds into common stock equity.

When the conversion occurs, the carrying value of the bonds is transferred to the equity account and there is no gain or loss recorded in the income statement. For a detailed calculation of the convertible bond, you can read another article on the convertible bond.

The journal entry for this retirement is as follow: