Call Provisions and Sinking Fund Provisions

What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?

Call provision refers to a fixed-income instrument or bond provision which permits the initial issuer to retire ad repurchase the bods. The call provision comes typically with a time window in which the calling of the bond can take place with a particular price and added interest to be paid to the holders of the bond. A call of the bond mostly favors the issuer against the investor. Bonds call options are typically exercised by the issuer mostly when the interest has declined. Sinking fund call refers to a provision permitting a bond issuer the chance to purchase outstanding bonds for a set rate from bondholder, by use of cash from the earning of issuer specifically saved for security buybacks. Since the provision increases doubt for investors over if the bond will get on paying till the date of maturity, a sinking fund call is perceived as investors additional risk. Securities with sinking call provision thus offer greater yield to makeup for increases investment risk (Petty et al., 2015).

Read also Pros and Cons of Sinking Funds

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