Redemption
The repayment of a bond at maturity or the repurchase of fund shares by an investor.
What is Redemption?
Redemption in finance refers to the return of an investor's principal in exchange for canceling a financial instrument. In the bond market, redemption occurs when the issuer repays the face value at the bond's maturity date, or when calling a callable bond early at a specified call price. In the mutual fund and ETF context, redemption is the process by which investors sell their fund shares back to the fund at the current net asset value (NAV), with the fund liquidating underlying positions as needed to meet the cash demand. Large-scale fund redemptions during periods of market stress can force portfolio managers to sell assets at unfavorable prices, potentially amplifying market declines—a dynamic known as a redemption spiral. Some funds charge short-term redemption fees (typically 1–2% for redemptions within 30–90 days) to discourage rapid trading that disadvantages long-term shareholders.
Example
When the U.S. Treasury redeems a 10-year note at maturity, it repays the $1,000 face value to each bondholder regardless of the price at which the bond traded on the secondary market during its life, fully extinguishing the government's obligation under that security.
Source: TreasuryDirect — Treasury Bonds