What Is a Sinkable Bond?

A sinkable bond is a type of debt that is backed by a fund set aside by the issuer. The issuer reduces the cost of borrowing over time by buying and retiring a portion of the bonds periodically on the open market, drawing upon the fund to pay for the transactions. The bonds usually have a provision that allows them to be repurchased at the prevailing market rat🐼e.

Sinka🐟ble bonds are a very safe investment for the bond investor because they are b༺acked by cash. However, their return is uncertain because it is dependant on the direction of bond prices in the market.

Understanding the Sinkable Bond

From the viewpoint of the corporations and municipalities that issue them, an advantage of sinkable bonds is that the money can be repaid entirely or in part if interest rates fall below the nominal rate o🧸f the bond. They can then refinance the balance of the money they need to borrow at a lower rate.

In addition, the issuersཧ are paying off their loans and the interest on them in installments, gradually reducing the sum due at the end of the term.

Calculating Yield to Average Life

Because sinkable bonds typically have shorter durations than their maturity dates, investors may calculate a bond’s 澳洲幸运5官方开奖结果体彩网:yield to average life when determining whether to purchase a sinkable bond. The yield to average life takes into consideration how long a bond may have bꦇefore retirement an♌d how much income the investor may realize.

The yield t🐼o average life is also important when bonds with sinking funds are trading below par, since repurchasing the bonds gives a bit of price stability.

Example of a Sinking Bond

Say Mars Inc. decides to issue $20 million in bonds with a maturity of 20 year♑s. The business creates a $20 million sinking fund and a call schedule for the next 20 years. On the anniverღsary date of each bond being issued, the company withdraws $1 million from the sinking fund and calls 5% of its bonds.

Because the sinking fund adds stability to the repaym🍸ent pr🌜ocess, the ratings agencies rate the bonds as AAA and reduce the interest rate from 6.3% to 6%. The corporation saves $120,000 in interest payments in the first year and additional money thereafter.

The enhanced repꦫayment protection offered by the sinking funds is attractive to investors seeking a safe investment. However, investors may🔥 have concerns over the bonds being redeemed before maturity, as they will lose out on interest income.

Companies are required to disclose their sinkable bond obligations through their corporate financial statements and prospectus.