Bond Valuation and Structuring

The Management of Sinking Funds: The World Bank Experience

Journal of Fixed Income (June 1993)

An illustration of the complexities and challenges of sinking fund management, showing the power of the refunding efficiency concept.

The Sure Thing – Bond Refunding: How Operations Research Made Its Mark on Wall Street

OR/MS Today (April 1993)

How Bell System treasurers came to embrace Dr. Kalotay’s idea of refunding efficiency.

Sinking Fund Prepurchases and the Designation Option

Financial Management (Winter 1992)

Issuers of bonds with sinking fund provisions may reduce borrowing costs by purchasing and retiring portions of their own outstanding bond issues before maturity through “designation” options. This paper develops elements of an issuer’s optimal strategy for sinking fund prepurchases, designations and calls.

The Valuation and Management of Bonds with Sinking Fund Provisions

Financial Analysts Journal (March/April 1992)

Sinking fund bonds incorporate interrelated options whose value is affected by market purchases on the part of either the issuer or investors. Valuation methods described in this paper lead to concrete guidance for investors to maximize the value of their bonds, and for issuers to optimize benefits from the various options they possess.

Embedded Call Options and Refunding Efficiency

Advances in Futures and Options Research (Vol. 3, 1988)

A bond should be called when the company’s refunding rate is below a specified target rate determined by interest rate volatility plus several factors whose combined impact is captured in a single percentage figure known as refunding “efficiency.” This paper explains how to compute refunding efficiency and the target refunding rate.

An Analysis of Original Issue Discount Bonds

Financial Management (Autumn 1984)

Zero-coupon and other bonds issued at a discount first appeared in 1981. Comprehending OID bonds requires understanding how taxes, interest rate risk, and call and sinking fund provisions influence their value differently than traditional par bonds.

Optimum Bond Calling and Refunding

Interfaces (November 1979)

One of the earliest published explanations of the concept of efficiency in calling and refunding bonds, this paper explains how analytical techniques developed at Bell Labs and AT&T influenced the Bell System’s decisions to refund more than $2 billion of callable debt during 1976 and 1977.

Tax Differentials and Callable Bonds

Journal of Finance (September 1979)

When a borrower has a higher tax rate than the lender; on an after-tax basis both parties benefit from a callable bond compared with either a noncallable or putable one. Because corporations are taxable and major lenders such as pension funds are not, this explains the prevalence of callable corporate bonds and the rarity of putable bonds.
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