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.
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.
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.
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.
