sinking fund provision

(redirected from Sinking Fund Provisions)

Sinking Fund Provision

A provision in some bond indentures requiring the issuer to put money aside to repay bondholders at maturity. In bonds with such a provision, a fund or account is set up into which an issuer deposits money on a regular basis to repay the bond when it matures. See also: Sinking Fund Bond.

sinking fund provision

A stipulation in many bond indentures that the borrower retire a certain proportion of the debt annually. The retirement may be effected by calling the bonds from the investors (if interest rates have declined) or by purchasing the bonds in the open market (if interest rates have increased). This orderly retirement may be advantageous to a bondholder because it creates some liquidity; however, it also may cause the holder to give up a high-yielding bond at the call price (often at par) during a period of reduced interest rates. Also called bond sinking fund. Compare doubling option. See also funnel sinking fund.
References in periodicals archive ?
Also on Friday, state-owned Deposit Insurance Agency (DIA) extended a RUB295bn (USD9bn/EUR6.8bn) loan to Bank of Moscow, which was utilised the next day for the purchase of RUB295bn in government bonds, placed by the country's finance ministry with sinking fund provisions for the purpose of the bailout.
Call and sinking fund provisions also influence bond betas since both alter the duration of the bond, and bond betas are increasing functions of duration.
[SF.sub.i] = Sinking fund provision for bond i, measured by a dichotomous variable with i zero indicating no sinking fund provision and one indicating the presence of a sinking fund provision
Sinking fund provisions can serve as substitutes for call provisions (Kalotay and Williams (1992) and Ogden (1988)).
The Use of Sinking Fund Provisions This table presents data on the fraction of noncallable and callable bonds that included sinking funds by rating category.
Williams, 1992, "The Valuation and Management of Bonds with Sinking Fund Provisions." Financial Analysts Journal (March-April), 59-67.
Mitchell examines the joint decision to include a call option, a sinking fund provision or a refunding provision, and the choice of maturity, while Thatcher investigates the decision to issue a two-tiered call option.
Other data components summarize call features, mandatory and optional redemption provisions including designated and risk events holders repayment options, liquidation and exercise rights, covenants for exchange and conversion, and sinking fund provisions.
* Many corporate bond indentures contain sinking fund provisions. Previous work in this area has analyzed these provisions in terms of interest rate risk,(1) default risk,(2) and the "accumulation game," in which investors increase the value of a sinking fund bond issue by increasing the concentration of its ownership.(3) This paper studies sinking fund bonds when an issuer has bought some of its own bonds in anticipation of future sinking fund requirements.
Of the 192 bonds for which Moody's supplied sufficient information, 90, or 46.88%, had sinking fund provisions. This statistic does not tell the full story, however, because sinking funds are most common in long-term issues.
Exhibit 2 reveals that bonds of lower credit quality are more likely to contain sinking fund provisions. This fact can be explained by the Myers |10~ argument that sinking funds are designed to "reduce creditors' exposure in parallel with the expected decline in the value of assets in place." The worse the credit quality, the greater the need for this kind of protection.
The Prevalence of Optional Sinking Fund Provisions Number in Sample % in Sample No optional sinking fund 19 7.39% Double-up option 209 81.32% 2.5-up option 11 4.28% Triple-up 18 7.00% Note: Data collected from Moody's Industrial Manual, 1990.