Redemption: Definition, Example and Related Terms
What is Redemption ?
Redemption is like getting something back that you've previously lost, but you have to pay for it. Imagine you want to buy a toy but you don't have enough money. So, you borrow some money from your friend and buy the toy. However, you promise to give the toy to your friend if you can't pay back the money in time. Unfortunately, you can't pay back in time, so your friend takes the toy. Later, when you finally have enough money, you give it to your friend and get your toy back. This is a simple example of redemption. It's a process where you reclaim something you've lost by paying a certain amount.
In the grown-up world, redemption is often used in the context of financial and business matters. For example, when you take out a loan to buy a house, the bank technically owns the house until you've paid back the loan. If you manage to pay off the loan earlier than expected, you can reclaim full ownership of the house from the bank. This is known as 'redeeming' the house. It's also used in the world of investments. When you invest in certain financial products like bonds or mutual funds, you can 'redeem' your investment by selling it back to the issuer for its current value.
Scenario Explanation Paying off a car loan early If you took a loan to buy a car, and you manage to pay it off before the loan term ends, this is a form of redemption. You're effectively 'buying back' the ownership of the car from the bank. Selling your shares in a mutual fund When you invest in a mutual fund, you're buying 'shares' of the fund. If you decide to sell your shares back to the fund, this is known as 'redeeming' your shares. You're essentially selling your ownership stake in the fund back to the issuer. Returning a product to a store If you buy a product from a store and then return it for a refund, this can also be seen as a form of redemption. You're 'buying back' your right to the money you spent on the product.