Sinking Fund Provisions

[CulturedQuant]

Anyobody here could help me understnad better the concept of sinking fund.

What advantages and disadvantages to Issuer and Bondholders?

What is the accounting implication of principal and interest to both parties?

 

[jamespucyk]

Sinking Fund: The right for the issuer to retire a portion of an issue every year to improve the credit rating.

Advantage Issuer: Reduces interest payments with less bonds outstanding, is usually not included in a bond's "non-call" feature as it's considered a redemption.

Disadvantage Issuer: Usually there is a pledge to sink a certain portion of the outstanding each year.

Advantage Holder: Larger yield spread, than a similar option-free bond with the same credit rating.

Dis. Holder: Can be called.

Accounting: * Sinking fund is maintained by the issuer on the BS
* Gains and losses are accured as bonds are retired.

 

[Moldem]

Sinking fund provision is NOT a right for the issurer. Its an obligation for him.

Accelerated sinking fund provision is a right for the isuer.

 

[CulturedQuant]

Thanks guys, but the concept is still vague for me.

can someone illustrate by journal entry on both the books of the Issuer and bondholder?

Are the payments/contributions of the issuer affect the cash flows of the Investor? I thought payments on the sinking fund is made to another party called the trustee?

 

[sn8eye]

Sinking fund provision is not bad for bondholders as long as the the bond in question is not callable. It is a form of security to reduce default if the sinking fund is held by an independent trustee. It can used by non-investment grade corporations to issue bonds at lower rates than otherwise.