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What is a redeemable security?

Redeemable security is the one which can be liquidated into cash by the issuer at investor’s request. The most common redeemable security available in the market is the open-ended mutual fund. Any open-ended mutual fund can be purchased and redeemed upon investor’s request. An asset management company (AMC) or a fund house issues redeemable securities (mutual funds). Investors can directly purchase and sell these redeemable securities with the fund house or through an intermediary.

What is redeemable value?

Redeemable value is the value where the issuing company decides to repurchase the security on or before the maturity date.

Redemption is one term with multiple use cases. One way of understanding redemption is when an institution issuing redeemable security wants to repurchase the security to repay the money raised against it on or before its maturity. In this case, the redemption value would be the repurchase value. This is one of the most common uses of the word “redemption value”.

However, investors can also redeem their investments (shares, mutual funds and bonds) by selling part of their investments. In this case, the redemption value (maturity value) is the value at which the investors sell their investments.

Are stock redemptions taxable?

The taxation on stock redemptions depends on whether the shareholder’s equity interest remains the same or reduces after a stock redemption.

A stock redemption is the repurchase of shares (trading on the stock exchange) by a company. It is in exchange for cash or property or any other security. In other words, a stock redemption happens when a company buys back its shares from the market.

Stock redemption is treated as a dividend if the investor’s equity remains the same in the company after the buyback. Then this income is taxable like dividend income.

A capital sale occurs when the investor’s equity reduces during the buyback. The gain or loss from the transaction is taxable.

What is redeemable and irredeemable debt?

Redeemable debt is a debt which is repayable back to the lender by the borrower within the specific period. Irredeemable debt is perpetual debt. The borrower need not repay it back to the lender. However, interest payments are regular on irredeemable debt. Redeemable debt has a fixed maturity date. In contrast, irredeemable debt has no specific maturity period or no redemption date.

How is redeemable value calculated?

Redeemable value is the value where the issuing company decides to repurchase the security on or before the maturity date. Redemption value for investors is the maturity value of the investment. In case of mutual funds, if the investors place a redemption request before the market closes, then their investments are redeemable at that day’s NAV. NAV is the sum of all the assets less any liabilities. In case the funds have any exit load, the redeemable value will be lesser to the extent of that fee amount.

What is maturity value?

Maturity value is the value of an investment at the end of the tenure. In other words, it is the amount the investor gets for holding the investment until its duration. The formula for calculating maturity value is

Maturity Value = P*(1+r)^n

P is the Principal Amount

r is the rate of interest

n is the number of compounding intervals

Published on October 2, 2020
Sannihitha Ponaka
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