Sinking Fund Research Articles

Valuation of Varying Profit Rents – Part 1

Reconsiders the double sinking fund problem by looking at each of the common methods used. Investigates the underlying assumptions and the residual errors or inconsistencies. Notes that the use of traditional dual rate valuations results in a mathematical error within the valuation and an under‐valuation of the interest. Concludes that the Double Sinking Fund Method must be recommended in preference to Pannell′s Method.

The dynamic structure of optimal debt contracts

In a two-period model of costly state verification, the optimal contract is characterized and shown to exist. The optimal contract is interpreted as a bond contract. The model extends the result of one-period models that the verification region must be a left-tail interval to a multi-period setting. Conditions are identified for the optimal contract to exhibit features such as call (prepayment) option, coupon payment, or sinking fund. The optimality of certain bond covenants such as “refinancing covenants” and “dividends covenants” is also studied.

Sinking Funds and the Agency Costs of Corporate Debt

AbstractThis paper examines whether a firm's sinking fund decision is affected by agency costs. The paper argues that sinking funds can be an effective device to resolve the problems of information asymmetry, risk incentives, and suboptimal investments. Empirical tests are provided. Results show that firms with certain characteristics related to agency problems tend to adopt a sinking fund provision in the bond indenture.

A Discounted Cash-Flow Model of Convertibles Subject to Multiple Calls in a World of Refunding Costs and Stochastic Interest Rates

Fixed-income securities which can be converted into other assets such as common stock represent a sizable portion of the capital market [33], and have therefore received frequent attention in the financial literature [20; 21; 23; 35; 39]. However, due to their complexity, attempts to develop mathematical models of convertibles have encountered severe computational and theoretical difficulties [36]. One of the primary complications results from convertible securities generally having contractual call features which permit the issuing organization to redeem the securities at stipulated dates for specific prices. In addition, although a majority of convertibles listed in Moody's Bond Guide have sinking funds, the issue of analyzing convertible sinking fund calls represents a specific problem that has never been adequately addressed. Early studies of convertibles, such as Brigham [10], focused on the discounted cash-flow approach to valuing the securities. The general procedure was to estimate a terminal price for the convertible on an arbitrarily specified date in the future and then take the present value of the price together with all intervening fixed-income payments. These models lacked precision insofar as no theoretical framework was developed for specifying the relevant terminal date, terminal price, or discount rate, and the individual effect of each call feature on convertible values was largely ignored. Other research, such as Walter and Que [38], has employed regression analysis to pro

THE EFFECT OF A SINKING FUND ON THE REOFFERING YIELDS OF NEW PUBLIC UTILITY BONDS

AbstractIn this study, empirical tests are conducted to determine the impact of a sinking fund on reoffering yields of a sample of new public utility bonds sold between January 1977 and March 1982. The findings of the regression analysis are consistent with the hypotheses that the value of the sinking fund varies with the default risk of the issuer and with market expectations of future interest rate movements, and that the sinking fund improves the liquidity of a bond issue.

A rationale for the sinking-fund provision in a quasicompetitive corporate-bond market

This article studies the effect of the sinking fund on the value of a corporate bond under each of three market regimes, and considers whether under such regimes there exists a rationale for its widespread use. Under a set of conditions that includes a perfect capital market, the sinking fund has an unambiguous negative effect on the value of a bond, but there is no rationale for its existence. When agency costs are added, there is a rationale for the sinking fund, but it is not distinct. However, a distinct rationale for the sinking fund develops in a quasicompetitive market that involves two imperfections: 1) agency costs, and 2) the potential for accumulation of an issue by a single investor. Accumulation potential neutralizes shareholders' incentives to expropriate wealth from bondholders in states in which the standard call option is ineffective. The analysis also has implications for the efficient functioning of the corporate-bond market.

VALUATION OF THE PREFERRED STOCK SINKING FUND FEATURE: A TIME‐SERIES APPROACH

AbstractThis study employs a time‐varying coefficient model to examine the relationship between returns on preferred stock with a sinking fund and preferred stock without a sinking fund. The results provide evidence of a major shift in the relationship between the two types of preferred stock coincident to a major change in Federal Reserve Board monetary policy. Results also show several smaller shifts at other times. The findings lend only weak support to link the announcement of a change in bookkeeping practices for insurance companies with a contemporaneous change in the relationship between the two types of preferred issues, as previous studies contended.

Agency Costs and Sinking Fund Provision

Agency Costs and Sinking Fund Provision

Shelf Registration: Competition and Market Flexibility

Previous articleNext article No AccessShelf Registration: Competition and Market FlexibilityDavid S. Kidwell, M. Wayne Marr, and G. Rodney ThompsonDavid S. Kidwell Search for more articles by this author , M. Wayne Marr Search for more articles by this author , and G. Rodney Thompson Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by The Journal of Law and Economics Volume 30, Number 1Apr., 1987 Sponsored by The University of Chicago Booth School of Business and The University of Chicago Law School Article DOIhttps://doi.org/10.1086/467135 Views: 5Total views on this site Citations: 24Citations are reported from Crossref Copyright 1987 The University of ChicagoPDF download Crossref reports the following articles citing this article:Mark Humphery-Jenner, Sigitas Karpavicius, Jo-Ann Suchard Underwriter relationships and shelf offerings, Journal of Corporate Finance 49 (Apr 2018): 283–307.https://doi.org/10.1016/j.jcorpfin.2018.01.004Chitru S. Fernando, Vladimir A. Gatchev, Anthony D. May, William L. Megginson Prestige without purpose? Reputation, differentiation, and pricing in U.S. equity underwriting, Journal of Corporate Finance 32 (Jun 2015): 41–63.https://doi.org/10.1016/j.jcorpfin.2015.04.002Chitru S. Fernando, Vladimir A. Gatchev, Anthony D. May, William L. Megginson Prestige Without Purpose? Reputation, Differentiation, and Pricing in U.S. Equity Underwriting, SSRN Electronic Journal (Jan 2014).https://doi.org/10.2139/ssrn.2473790Igor Kozhanov, Joseph Ogden Corporate Retail Notes: A Good Alternative for Individual Investors?, The Journal of Fixed Income (Sep 2013): 130918072545000.https://doi.org/10.3905/jfi.2013.2013.1.026Igor Kozhanov, Joseph P Ogden Corporate Retail Notes: A Good Alternativefor Individual Investors?, The Journal of Fixed Income 23, no.22 (Sep 2013): 82–97.https://doi.org/10.3905/jfi.2013.23.2.082Don M. Autore, Irena Hutton, Tunde Kovacs Accelerated Equity Offers and Firm Quality, European Financial Management 17, no.55 (Mar 2011): 835–859.https://doi.org/10.1111/j.1468-036X.2011.00597.xJo-Ann Suchard, Sigitas Karpavicius Are Equity Issuers Still Loyal? The Impact of Shelf Offerings on Underwriter Relationships, SSRN Electronic Journal (Jan 2011).https://doi.org/10.2139/ssrn.1786038MILES LIVINGSTON, JIE (DIANA) WEI, LEI ZHOU Moody's and S&P Ratings: Are They Equivalent? Conservative Ratings and Split Rated Bond Yields, Journal of Money, Credit and Banking 42, no.77 (Sep 2010): 1267–1293.https://doi.org/10.1111/j.1538-4616.2010.00341.xTimothy R. Burch, Vikram Nanda, Vincent Warther Does it pay to be loyal? An empirical analysis of underwriting relationships and fees, Journal of Financial Economics 77, no.33 (Sep 2005): 673–699.https://doi.org/10.1016/j.jfineco.2004.08.007 Bibliography, (Jan 2005): 231–241.https://doi.org/10.1016/B978-075065538-5.50014-2Timothy R. Burch, Vikram K. Nanda, Vincent A. Warther Does it Pay to Be Loyal? An Empirical Analysis of Underwriting Relationships and Fees, SSRN Electronic Journal (Jan 2004).https://doi.org/10.2139/ssrn.423901Bharat N. Anand, Alexander Galetovic Information, Nonexcludability, and Financial Market Structure, The Journal of Business 73, no.33 (Jul 2000): 357–402.https://doi.org/10.1086/209647Craig G. Dunbar The Choice between Firm-Commitment and Best-Efforts Offering Methods in IPOs: The Effect of Unsuccessful Offers, Journal of Financial Intermediation 7, no.11 (Jan 1998): 60–90.https://doi.org/10.1006/jfin.1998.0232Marcia Millon Cornett, Wallace N. Davidson, Nanda Rangan Deregulation in investment banking: Industry concentration following Rule 415, Journal of Banking & Finance 20, no.11 (Jan 1996): 85–113.https://doi.org/10.1016/0378-4266(94)00110-3Don Goldstein Uncertainty, Competition, and Speculative Finance in the Eighties, Journal of Economic Issues 29, no.33 (Jan 2016): 719–746.https://doi.org/10.1080/00213624.1995.11505706M. Wayne Marr, Jeffry M. Netter, Annette B. Poulsen Effects of securities deregulation in underwriting: An Analysis of SEC Rule 415, Journal of Regulatory Economics 6, no.11 (Feb 1994): 27–39.https://doi.org/10.1007/BF01065388David J. Denis THE COSTS OF EQUITY ISSUES SINCE RULE 415: A CLOSER LOOK, Journal of Financial Research 16, no.11 (Aug 2014): 77–88.https://doi.org/10.1111/j.1475-6803.1993.tb00129.xPeter Newman, Murray Milgate, John Eatwell S, (Jan 1992): 383–630.https://doi.org/10.1007/978-1-349-11721-5_6Robert Nachtmann, Frederick J. Phillips-Patrick The Competitive Impact of Foreign Underwriters in the United States, (Jan 1992): 211–245.https://doi.org/10.1007/978-94-011-2976-3_6Sara Ann Reiter PENSION OBLIGATION AND THE DETERMINATION OF BOND RISK PREMIUMS: EVIDENCE FROM THE ELECTRIC INDUSTRY, Journal of Business Finance & Accounting 18, no.66 (Nov 1991): 833–859.https://doi.org/10.1111/j.1468-5957.1991.tb00242.xDAVID S. ALLEN, ROBERT E. LAMY, G. RODNEY THOMPSON The Shelf Registration of Debt and Self Selection Bias, The Journal of Finance 45, no.11 (Apr 2012): 275–287.https://doi.org/10.1111/j.1540-6261.1990.tb05093.xDavid S. Kidwell, M. Wayne Marr, Joseph P. Ogden THE EFFECT OF A SINKING FUND ON THE REOFFERING YIELDS OF NEW PUBLIC UTILITY BONDS, Journal of Financial Research 12, no.11 (Aug 2014): 1–13.https://doi.org/10.1111/j.1475-6803.1989.tb00096.xF. DOUGLAS FOSTER Syndicate Size, Spreads, and Market Power during the Introduction of Shelf Registration, The Journal of Finance 44, no.11 (Apr 2012): 195–204.https://doi.org/10.1111/j.1540-6261.1989.tb02412.xDavid W. Blackwell, David S. Kidwell An investigation of cost differences between public sales and private placements of debt, Journal of Financial Economics 22, no.22 (Dec 1988): 253–278.https://doi.org/10.1016/0304-405X(88)90071-2

Determinants of the Relative Interest Rate Sensitivities of Corporate Bonds

The unprecedented price volatility observed in the bond market in recent years has caused investors to be keenly concerned about their exposure to interest rate risk. This paper examines the extent to which the interest rate sensitivity of corporate bond prices is affected by various characteristics. The characteristics examined include default risk, the call option, and the sinking fund. In Section II, several hypotheses are developed concerning the effect of each of these characteristics on the interest rate sensitivity of the corporate bond. The results of testing these hypotheses are reported in sections III through V. Section VI discusses the implications of the default risk analysis for the study of the systematic risk of corporate bonds. Section VII provides summary comments and implications.

THE DIFFERENTIAL EFFECTS OF SINKING FUNDS ON BOND RISK PREMIA

AbstractThis study analyzes the effect that two options created by the inclusion of a sinking fund clause in a bond indenture have on the bond issue's secondary market risk premium. The impact of market prices that exceed current sinking fund redemption prices, and of par versus premium redemption, is clearly apparent when a set of issue‐specific and macroeconomic control variables are incorporated into a model of bond risk premia. Thus, secondary market prices for the large‐volume utility bond transactions in the sample reflect knowledge of individual‐issue, time‐varying indenture characteristics.

A Closer Look at Stock-For-Debt Swaps

From August 1981 to April 1983, nearly 200 firms completed stock-for-debt swaps. There are two ostensible motivations for such a swap-increased earnings and reduced leverage. Although the swaps did boost reported earnings, leverage reduction was not material. Furthermore, an analysis of share price performance on the swap announcement dates indicates that returns for the portfolio of swapping firms were significantly negative; the did not capitalize 'financial statement improvements. A more reasonable motivation for stock-for-debt swaps is the effect of the Bankruptcy Tax Act of 1980 on sinking fund management. Before 1981, companies that purchased bonds at a discount to fulfill sinking fund requirements incurred essentially no tax liability. Since the effective date of the Act, however, these same sinking fund cash purchases of discount bonds generate a significant tax liability. By using a swap instead of purchasing the bonds with cash, companies can accomplish the transactions on a tax-free basis. The significant negative stock returns observed around swap dates may be due to the presence of accumulators in the sinking fund bond market; if accumulators corner the market in the floating supply of bonds, they can force issuers to pay premium prices for their bonds.

A strategic analysis of sinking fund bonds

Abstract Unlike most securities, the pricing of sinking fund bonds is influenced by the distribution of ownership, which summarizes the extent to which the market is cornered. The effect of the distribution of ownership on the pricing of sinking fund bonds is examined by an explicit game in which the price obtained for bonds sold can depend upon the size of the investor's position. This framework is used to contrast the valuation of sinking fund bonds with the valuation of amortizing bonds and straight debt. We show that it is generally incorrect to view sinking fund bonds as being equivalent to serial bonds.

Contingent Claims Analysis of Corporate Capital Structures: an Empirical Investigation

The Journal of FinanceVolume 39, Issue 3 p. 611-625 Session: Valuation of Corporate Claim Contingent Claims Analysis of Corporate Capital Structures: an Empirical Investigation E. PHILIP JONES, E. PHILIP JONESSearch for more papers by this authorSCOTT P. MASON, SCOTT P. MASONSearch for more papers by this authorERIC ROSENFELD, ERIC ROSENFELDHarvard UniversitySearch for more papers by this author E. PHILIP JONES, E. PHILIP JONESSearch for more papers by this authorSCOTT P. MASON, SCOTT P. MASONSearch for more papers by this authorERIC ROSENFELD, ERIC ROSENFELDHarvard UniversitySearch for more papers by this author First published: July 1984 https://doi.org/10.1111/j.1540-6261.1984.tb03649.xCitations: 365 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume39, Issue3July 1984Pages 611-625 RelatedInformation

Sinking Fund Preferred Stock

* Moody's Preferred Stock Ratings for January 1982 show about 30 new issues of preferred stock during the preceding year, raising approximately $1 billion. Only four of these issues lacked a sinking fund. This is typical of the interval since December 1978, when a regulatory change made preferred stock having a sinking fund feature an attractive investment to property and casualty insurers, as well as an interesting financing alternative to some fund raisers. The emergence of sinking fund preferred (SFP) may be the result of a market segmentation: trade journals of the principal issuers, public utilities, claim that relatively low dividend yields are required on these securities, while trade journals of the principal buyers, property and casualty insurers, state that tax-adjusted rates of return are relatively high on SFP. This phenomenon merits a closer look. A recent note by Sorensen and Hawkins (S&H) 116], due to its brevity, only hints at several major issues in SFP financing (e.g., accumulators and seller motives). Their note shows that yield traits of SFP over a three-year period before a regulatory change of De-

The Value of Corporate Debt with a Sinking-Fund Provision

A systematic investigation into the effects of sinking-fund provisions is important considering the preponderance of these provisions in corporate bond indentures. Approximately 80% of all publicly traded corporate issues contain a sinking-fund feature amortizing on average more than 50% of the principal amount of these issues. Thompson and Norgaard (1967) find these proportions to be stable over the 1960-67 period. McKeon (1980) reports 78.6% of all industrial bonds outstanding in 1979 contained a sinkingfund provision. Furthermore, sinking-fund provisions are a particularly common occurrence in mediumand low-grade issues but are less prevalent in high-grade issues. This relationship is most striking in utility issues. Thompson and Norgaard report that only 30% of Aa rated utilities issued in 1963 contained sinking-fund provisions whereas 100% of Baa rated new issues contained such a provision. A sinking-fund provision obligates the firm to amortize a portion of the debt prior to maturity. It gives the firm the option to satisfy this amortization requirement by either purchasing the bonds to be redeemed from the market or calling the bonds by means of a sinking-fund call. Thus, Most corporate debt issues contain a sinkingfund provision which provides for periodic retirement of a proportion of the issue prior to maturity. Retirement may be achieved either through a call at a specified price or through market purchases. This paper considers the value of a sinking-fund provision in the context of a contingent claims valuation model. It is concluded that the value of the sinking fund is determined by the risk of the underlying firm, the initial yield to maturity of the issue, and the sinking fund's redemption rate. The value of sinking-fund debt is calculated over a range of parameter values, and the conditions under which the sinking-fund provision is valueless are determined.

THE VALUATION OF VARYING INCOMES: 2

About 20 years ago it was recognised that an anomaly could arise in the application of the dual rate method of valuation where the income varied during the term, and in subsequent years various methods of modifying the dual rate calculation were proposed, including the Double Sinking Fund Method (A. W. Davidson), and the Annual Equivalent and Sinking Fund Methods (M. J. Greaves). A further alternative, Pannell's method, has also been suggested, but it is not considered here. These three methods give somewhat differing results as demonstrated by Baum and Mackmin,1 since the underlying assumptions are different. These latter authors came to the conclusion that the Double Sinking Fund Method (DSF) in particular could result in a degree of over‐valuation and the purpose of this paper is to examine the reasons for this.

THE VALUATION OF VARYING INCOMES: 3

In the previous paper the reasons for the well known anomaly in the valuation of varying incomes of limited duration were examined and it was shown that the Double Sinking Fund Method as originally proposed did not solve the problem where different remunerative rates of interest were used. It was pointed out that in fact the problem was not a dual rate problem but a triple rate one since during some part of the life of the income there were three different rates of interest operating. If, however, the problem is constrained by requiring that during any part of the period only one remunerative rate is permitted, then the Double Sinking Fund Method is consistent, providing that it is appreciated that during one period there will be a shortfall of income which is exactly balanced by a surplus in another when each is capitalised at the corresponding remunerative rates.

TOWARDS A STANDARD PROPERTY INCOME VALUATION MODEL: RATIONALISATION OR STAGNATION?

In a previous paper Sykes derived a mathematically consistent investment valuation model for freehold properties which he referred to as the Rational Model. This new model overcomes certain serious failings of other methods commonly in use. The present paper readdresses the arguments of the earlier paper in a manner rather more familiar to a practising valuer and compares current methods of valuation with the Rational Model. It is also shown that the Rational Model can be simply adapted for the valuation of leasehold interests without resorting to a separate (and usually quite artificial) ‘sinking fund’ rate.

SINKING FUND PREFERRED STOCK

* Moody's Preferred Stock Ratings for January 1982 show about 30 new issues of preferred stock during the preceding year, raising approximately $1 billion. Only four of these issues lacked a sinking fund. This is typical of the interval since December 1978, when a regulatory change made preferred stock having a sinking fund feature an attractive investment to property and casualty insurers, as well as an interesting financing alternative to some fund raisers. The emergence of sinking fund preferred (SFP) may be the result of a market segmentation: trade journals of the principal issuers, public utilities, claim that relatively low dividend yields are required on these securities, while trade journals of the principal buyers, property and casualty insurers, state that tax-adjusted rates of return are relatively high on SFP. This phenomenon merits a closer look. A recent note by Sorensen and Hawkins (S&H) 116], due to its brevity, only hints at several major issues in SFP financing (e.g., accumulators and seller motives). Their note shows that yield traits of SFP over a three-year period before a regulatory change of De-