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What Is a Sinkable Bond?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 November 2016
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    2003-2016
    Conjecture Corporation
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A sinkable bond is a type of bond issue that is insulated from possible default due to the creation of a backup source of funding known as a sinking fund. This fund is established by the issuer of the bond and can be drawn upon when and as there is a need to disburse interest payments to bond holders or to repay the principal when the bond is called early. Considered an extremely safe type of bond issue, the sinkable bond may be repurchased incrementally using the proceeds from the sinking fund, allowing the issuer to take advantage of any lower interest rates that may have developed since the original launch of the bond issue.

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One of the chief benefits of a sinkable bond is that investors assume very little risk in terms of possible default on the bond issue. While it is not unusual for issuers to secure insurance coverage when offering a municipal or corporate bond to investors, that insurance usually only comes into play if the issuer is in danger of a default. Owing to the sinking fund that is maintained by the issuer, there is actually money on hand to ensure interest payments are issued without fail, even if the average rate of interest has fallen below the fixed rate associated with the sinkable bond. In addition, issuers can incrementally add to the balance in the sinking fund, and use those proceeds to repurchase portions of the bond that can then be reissued at a lower rate of interest.

Issuers also benefit from offering a sinkable bond. Since the risk level is lower, it is possible to offer the bond with a lower rate of interest. In addition, the presence of the sinking fund means that even if the venture funded with the proceeds from the bond does not produce sufficient revenue, the money deposited in the backup fund will offset any difference. As a result, the issuer is much less likely to experience any type of real financial hardship with this type of bond issue.

Investors can utilize the services of brokers to locate viable sinkable bond issues for consideration, and compare current offerings to find the ones that offer the greatest potential for returns. While the risk level is extremely low, taking the time to assess the stability of the entity issuing the bond is always a good idea. By comparing interest rates, duration, and other key factors, investors can find sinkable bond issues that will mature in a reasonable period of time, enjoying periodic interest payments in the interim.

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