The call provision generally states that the issuer must pay the bondholders an amount greater than the par value if they are called. Lu Valens Pundit. What is sinking fund provision? 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. Tanta Daugherty Pundit. What are call provisions and sinking fund provisions? A call provision gives the issuing corporation the right to call the bonds for redemption. The call provision generally states that the company must pay the bondholders an amount greater than the par value if they are called. The sinking fund provision facilitates the orderly retirement of the bond issue. Aroa Delrieu Pundit. What is soft calling? A soft call provision requires that the issuer pay bondholders a premium to par if the bond is called early, typically after the hard call protection has passed.
Convertible bonds can include both soft and hard call provisions, where the hard call can expire, but the soft provision often has variable terms. Dalmacio Minniahmetov Pundit. What is a non call period? Definition of Non - Call Period. Conchin Calaza Pundit. What is a soft put? Select personalised ads.
Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Call protection is a provision of some bonds that prohibits the issuer from buying it back for a specified period of time. The period during which the bond is protected is known as the deferment period or the cushion. Bonds with call protection are usually referred to as deferred callable bonds.
A bond is a fixed income security that is used by a company or a government to raise money. The funds raised by selling the bonds are typically intended for use in a specific project. Bonds have a maturity date which is the date on which the principal investment is repaid to the bondholders. As compensation for lending their money, the investors receive interest payments in increments from the issuer until the bond reaches its maturity or expiration date.
These interest payments are known as coupon payments and are fixed for the duration of the bond contract until the bond reaches its maturity or expiration date. At that time, the investor's principal is returned. High-quality bonds are known as relatively risk-free investments, but in fact, both the issuer and the buyer are taking on some risk. If interest rates in general rise during the life span of the bond, the investor has lost an opportunity to get a better return for the money.
If interest rates fall, the company or government that issued the bond is losing an opportunity to borrow money at a cheaper cost. Callable bonds may have ten years of call protection, while call protection on utility bonds is typically limited to five years.
Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. In corporate finance and capital markets, refunding is the process where a fixed-income issuer retires some of their outstanding callable bonds and replaces them with new bonds, usually at more favorable terms to the issuer as to reduce financing costs.
The new bonds are used to create a sinking fund to repay the original bond issues, known as refunded bonds. Refunding may also refer to reversing transactions in the retail or commercial space, often to make a customer whole due to a faulty or poor quality product or service.
Refunding redeems an outstanding bond issue at its maturity value, typically the full amount of the outstanding principal plus any applicable interest, by using the proceeds from the newly issued debt. This new debt is, almost always, issued at a lower rate of interest than the refunded issue and, often, results in a significant reduction in interest expense for the issuer.
Another reason for refunding is to remove any undesired restrictions and covenants that are tied to the terms of the existing bonds being refinanced. When bonds are issued, there is a chance that interest rates in the economy will change. If interest rates decrease below the coupon rate on the outstanding bonds, an issuer will pay off the bond and refinance its debt at the lower interest rate prevalent in the market.
The proceeds from the new issue will be used to settle the interest and principal payment obligations of the existing bond. In effect, refunding is likely to be more common in a low interest-rate environment, as issuers with significant debt loads have an incentive to replace their maturing higher-cost bonds with cheaper debt.
Refunding only occurs with bonds that are callable. Callable bonds are bonds that can be redeemed before they mature. Bondholders face call risk from holding these bonds—risk that the issuer will call the bonds if interest rates decline. To protect bondholders from having the bonds called too early, the bond indenture includes a call protection clause.
Ask about these and any other special redemption provisions that may apply to bonds you are considering. You can avoid the complications and uncertainties of calls altogether by buying only noncallable bonds without sinking-fund provisions. If you do buy a callable bond and it is called, be aware that its actual yield will be different than the yield to maturity you were quoted. So ask your financial consultant to tell you what the yield to call is as well.
Just as some issuers have the right to call your bond prior to maturity, there is a type of bond—known as a put bond—that is redeemable at your option prior to maturity.
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