What is a sinking fund requirement in a bond issue?
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.
What type of bonds have sinking funds?
A sinking fund is typically listed as a noncurrent asset—or long-term asset—on a company’s balance sheet and is often included in the listing for long-term investments or other investments. Companies that are capital intensive usually issue long-term bonds to fund purchases of new plant and equipment.
How do bond maturities work?
When the maturity date arrives, the issuer is obligated to pay a bond’s owner the face value of the bond plus any accrued interest. With most bonds, interest is paid out periodically and the only interest paid at maturity is the amount earned since the last interest payment.
What is the requirement to create a sinking fund?
Sinking Fund Requirement means, for any fiscal year or calendar year, the principal amount of Term Bonds required to be purchased, redeemed or paid at maturity in such year as established by the ordinance of the City authorizing the issuance of such Term Bonds.
What is a sinking fund requirement in a bond issue quizlet?
Terms in this set (16) A sinking fund typically requires no call premium. provision that requires the corporation to retire a portion of the bond issue each year. The purpose of the sinking fund is to provide for the orderly retirement of the issue. A sinking fund typically requires no call premium.
Who manages a bond’s sinking fund?
An independent trustee will invest the corporation’s annual deposits with the goal of the sinking fund balance growing to approximately $20 million by the time the bonds come due in 20 years. The corporation will report the bond sinking fund balance in the investments section of its balance sheet.
What is the purpose of the sinking fund?
The purpose of a sinking fund is to assure investors that provision has been made for repayment of bonds at maturity.
Who benefits from a sinking fund provision on a corporate bond?
investors
A corporate sinking fund attracts investors because it provides a measure of protection to creditors. Sinking funds allow companies to control the amount of their debt through repayment or retirement of bonds. A small business with control over its debt is less likely to default on its bond obligations.
Do sinking funds require a trustee?
Sinking fund bonds require the issuer to make periodic cash contributions to a sinking fund trustee. The goal is to reduce the risk to bondholders through these periodic transfers.
What are the 3 basic components of bonds?
Bonds have 3 major components: the face value—also called par value—a coupon rate, and a stated maturity date. A bond is essentially a loan an investor makes to the bonds’ issuer.
What are the three major features of bonds?
All bonds have three characteristics that never change:
- Face value: The principal portion of the loan, usually either $1,000 or $5,000.
- Maturity: The day the bond comes due.
- Coupon:
When can sinking fund be used?
Often, it is used by corporations for bonds and deposits money to buy back issued bonds or parts of bonds before the maturity date arrives. It is also one way of enticing investors because the fund helps convince them that the issuer will not default on their payments.
Where does bond sinking fund go on balance sheet?
A corporation’s bond sinking fund appears in the first noncurrent asset section of the corporation’s balance sheet. This section is likely to have the heading Investments. The bond sinking fund is a noncurrent (or long-term) asset even if the fund contains only cash.
What are the 5 characteristics of bonds?
Characteristics of bonds
- Face value. Corporate bonds normally have a par value of $1,000, but this amount can be much greater for government bonds.
- Interest.
- Coupon or interest rate.
- Maturity.
- Issuers.
- Rating agencies.
- Tools and tips.