Definition
An extendible bond is a type of fixed-income security that provides an option to extend the bond’s maturity date beyond the initial term, subject to the agreement of all involved parties—typically the bond issuer and the bondholders. This extension can offer strategic advantages depending on market conditions, interest rate shifts, and the financial needs of both issuers and investors.
Examples
Example 1: A Corporate Extendible Bond
A corporation issues a five-year extendible bond with a provision that allows both the issuer and investors to agree to extend the bond’s maturity by another five years. If market interest rates drop, an investor might prefer to extend the bond to continue receiving higher interest payments.
Example 2: Government Extendible Bond
A government issues a ten-year extendible bond aimed at financing infrastructure projects. Midway through the term, if the government anticipates a lower borrowing cost, it might opt to negotiate an extension to delay issuing new bonds at potentially higher rates.
Frequently Asked Questions (FAQs)
What are the benefits of an extendible bond for the issuer?
The issuer benefits by potentially deferring refinancing costs and avoiding the need to issue new bonds, especially under unfavorable market conditions.
How do extendible bonds differ from callable bonds?
While extendible bonds allow for the extension of the maturity date by mutual agreement, callable bonds grant the issuer an exclusive right to redeem the bond before its maturity date at predetermined terms.
Can all bonds be extended?
No, only bonds that include specific extendible provisions agreed upon at issuance can be extended.
What factors do investors consider when agreeing to extend a bond?
Investors consider current and projected interest rates, the issuer’s creditworthiness, and the performance of the bond instrument in comparison to alternative investments.
Is there a typical extension period for extendible bonds?
There isn’t a standard period; the extension terms are specified in the bond’s indenture and agreed upon by the parties involved.
Related Terms with Definitions
Callable Bond
A bond that grants the issuer the right to repay the bond before its scheduled maturity date at a set price.
Putable Bond
A bond that gives the bondholder the right to force the issuer to repurchase the bond before maturity, typically at a predetermined price.
Bullet Bond
A bond with a fixed maturity date and no options for early redemption or extensions.
Convertible Bond
A bond that can be converted into a predetermined number of the issuer’s equity shares, providing potential upside with equity appreciation.
Online References
Investopedia: Extendible Bond
Investopedia on Extendible Bonds
Securities and Exchange Commission (SEC): Bonds
Financial Industry Regulatory Authority (FINRA): Bond Basics
Suggested Books for Further Studies
1. “The Bond Book” by Annette Thau
A comprehensive guide to understanding and investing in bonds, including various types of bonds like extendible bonds.
2. “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
Explores bond market strategies and the analytical techniques used for different types of bonds and their instruments.
3. “Fixed Income Analysis” by Barbara S. Petitt and Jerald E. Pinto
Provides in-depth knowledge of fixed-income securities and investment strategies, useful for both analysts and investors.
Accounting Basics: “Extendible Bond” Fundamentals Quiz
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