An election period is a specified period of time in which an investor holding a retractable or extendable bond may exercise the option to extend the bond issue or shorten the term of the bond. Typically, this time period is specified in the provisions that relate to the purchase of the bond. Should the bondholder choose to not exercise this option, the bond will continue according to the base terms, and reach maturity based on those terms.
In order to understand how an election period functions, it is important to determine what is meant by an extendable or retractable bond. Bonds of this type function in a manner similar to other bond issues, in that investors purchase the issues and hold them until maturity. At that point, the investor is entitled to the original investment plus any interest that is accrued from the date of purchase to the point of maturity. What is different with these two types of bonds is that the investor has the ability to change that maturity date, either moving it forward (retract) or push the maturity date further into the future (extend).
With these types of bonds, the election period and how it works is documented in the terms and conditions related to the purchase of the bond issues. In most cases, there is one or more specific windows of time during the life of the bond in which the investor may either push the maturity date back, or move it forward, depending on whether the bond is extendable or retractable. During those specified time periods, the investor must notify the bond issuer of the intent to exercise the option. Assuming the notification is made in compliance with the terms of the bond, the issuer adjusts the maturity date accordingly.
There are several reasons why an investor may wish to exercise his or her right during an election period. One has to do with maximizing the return on the investments. For example, if the bond carries a variable rate of interest and the investor has reason to believe that the applicable interest rate will decrease significantly as the maturity date draws closer, he or she may decide that moving up that date will avoid at least part of the drop and increase the returns on the bond issue. At the same time, if the investor believes that interest rates will significantly improve over time, it may be wise to make use of the election period and push the maturity date further into the future to take advantage of that increase.
