Income Stream Annuity and Call & Sinking funds

Business & Finance
Tutor: None Selected Time limit: 1 Day

When we look at business ventures we are always looking for ways to raise capital in order to help our business grow over time. What are call and sinking fund provisions? Do these provisions make bonds more or less risky?

Sep 3rd, 2015

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A sinking fund is money taken from a corporation’s earnings that is used to redeem bonds periodically, before maturity, as specified in the indenture. It is a part of a bond indenture or preferred stock charter that requires the issuer to regularly set money aside in a separate custodial account for the exclusive purpose of redeeming the bonds or shares

A call, used together with the phrase 'Sinking fund', refers to  the act of redeeming a bond before its maturity.

Effect of these on Bonds

A call feature puts the investor at a disadvantage, callable bonds carry higher yields than noncallable bonds, but higher yield alone is often not enough to induce investors to buy them.

One investor benefit of a sinking fund is that it lowers the risk of default by reducing the amount of the corporation’s outstanding debt over time. Another is that the fund provides price support to the issue, particularly in a period of rising interest rates. However, the disadvantage—which usually weighs more heavily on investors’ minds, especially in a falling-rate environment—is that bondholders may receive a sinking-fund call at a price (often par) that may be lower than the current market price of the bonds.



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Sep 3rd, 2015

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