Sinkable bond
| Sinkable bond |
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| See also |
Sinkable bond is a bond protected by the sinking fund. That enables a feature of scheduled amortization. Bond is paid not when it matures, but yearly. For example, 10-years sinkable bond will be paid 1/10 each year. Therefore, in the case of sinkable bonds weighted average life of the bond is important (it is shorter than the period until it gets mature).
Uses of the Sinkable bonds
Sinkable bonds may be used to pay off some large investments made e.g. by:
- municipalities or
- local governments.
That can be cheaper for them than taking loan paying interest payments. An issuer of a singable bond is required to buy the predefined amount of the bond at defined points at a sinking price. So if the interest rates fall below the nominal rate of the bond, the sinking fund can allow to repay the amount owed and refinance remaining balance[1]. Retirement of the principal can be through:
- bonds in the open market,
- by the repurchase of the notes or
- a partial call.
The sinking fund
The sinking fund might be either a curse or a blessing to the investor, depending on general bond market conditions during the time when the bonds are sunk. A lot of corporate bonds are both:
- sinkable and
- callable,
which need the calculation of the yield in order to control the lowest yield to the investor. The typical sinking fund will state that the percentage of the total bond issuance or a certain amount can be retired through the issuer at par. Because of some sinkable bonds supply the issuer with the extra option to grow the amount sunk on any given date.
Zero coupon bond
Some kind of debt instruments does not pay coupon interest until the bond is completely repaid. That kind of debt instruments is named zero-coupon bonds. The most famous is one type of zero-coupon bond - United States savings bonds. The United States saving bond is bought together with a discount to its final pay off value. The pay off value is either named:
- the maturity value or
- face amount.
There is a difference between its face amount and its purchase price which express not previously paid, only express the accumulation of interest earned. The United States saving bond share these feature with other zero coupon issues which embrace from the very short-term in the following areas[2]:
- 91day Treasure bills or
- municipal zero coupon debt issues,
- commercial paper emitted through corporations, and
- the very long-term, like 30 year Treasure zeros or
- equally long corporate.
There is a market rate of interest which establishes the discounted price of the debt instrument only when maturity on a zero coupon instrument has no coupon interest paid [3].
Footnotes
References
- Carfi D.,Musolino F., (2012)., Game theory model for European government bonds market stabilization: a saving-State proposal.
- Mecagni M.M., Krijenko J.I.C., Gueye C.A., Weber S., (2014)., Issuing International Sovereign Bonds: Opportunities and Challanges for Sub-Saharan Africa, International Monetary Fund
- Strumeyer G., (2012)., Investing in Fixed Income Securities: Understanding the Bond Market, John Willey and Sons
Author: Mateusz Gołda
