Bullet bond vs sinking bond in rising interest rate environment

CFA Level III Fixed Income
#1

Hello,

Please help me to understand the reason behind “sinking bonds will loose less than bullet bonds when rates rise”

Thanks in anticipation,

#2

A sinking fund provision means that the issuer has to retire a fixed percentage of the bonds every year. There are two ways in which the issuer can retire the bonds:

  • Repurchase outstanding bonds on the open market at the market price and deliver them to the trustee
  • Randomly select outstanding bonds and repurchase them from the bondholders at par, then deliver them to the trustee

If you were a bondholder, would you sell your bond on the open market at a price _ substantially below par _ when there is a chance that the issuer will call your bonds at par?

If you own a bond without a sinking fund provision, there is no possibility that the issuer will call your bonds at par when similar bonds are selling at well below par, so you haven’t that safety net.

#3

This question gets asked so many times on this forum…lol

#4

Got it! Thanks

#5

You’re welcome.