hi , can anyone help me to differentiate between amortizing securities and sinking fund provisions , i feel that they are the same. also i have a hard time understanding the concept of clean price , full price and dirty price when trading a bond. thanks
nutshell Wrote: ------------------------------------------------------- > hi , can anyone help me to differentiate between > amortizing securities and sinking fund provisions > , i feel that they are the same. > Well they probably have some similar characteristics as both pay off principal on a schedule. A sinking fund is a very specific thing that lays out a mechanism for bonds to be called or otherwise retired. An amortizing security just has early pay-off of principal and could include things like mortgages. > also i have a hard time understanding the concept > of clean price , full price and dirty price when > trading a bond. > dirty price = full price. clean price = dirty price - accrued interest. accrued interest = amount of interest that has accrued between bond settlement and last coupon date. > thanks
From Wikipedia: Comparison with amortizing bonds Sinking funds are similar to amortizing bonds: in an amortizing bond, the principal of each bond is repaid (amortized) over the life of the bond; in a sinking fund, some bonds are repurchased or called, effectively being repaid in full prior to maturity. Thus in both cases, the total debt outstanding decreases over the life of the bonds, but in one case, it happens across all bonds, while in the other, some bonds are repaid and others are not. Note also that sinking funds may be more discretionary – if a bond issuer fails to make a principal payment on an amortizing bond, they are in default, while a sinking fund may choose to not repurchase bonds, thus giving more flexibility.
Trogdor Wrote: ------------------------------------------------------- > Note also that sinking funds may be more > discretionary – if a bond issuer fails to make a > principal payment on an amortizing bond, they are > in default, while a sinking fund may choose to not > repurchase bonds, thus giving more flexibility. but what i understand is that sinking fund provisions are used to reduce credit risk , so i guess if the issuer decided not to amortize the specified amount , the issuer will be in default too ?
For an amortizing security (e.g. pool of mortgages), investment is being amortized every month. In other words, payees pay both interest and notional. In a sinking fund, you can, but don’t have to pay principal until the bond maturity. It’s a free call option in case you can issue a debt at lower coupon. You sure it’s a credit risk, not an interest rate risk that is being managed?
Trogdor Wrote: ------------------------------------------------------- > For an amortizing security (e.g. pool of > mortgages), investment is being amortized every > month. In other words, payees pay both interest > and notional. > > In a sinking fund, you can, but don’t have to pay > principal until the bond maturity. It’s a free > call option in case you can issue a debt at lower > coupon. You sure it’s a credit risk, not an > interest rate risk that is being managed? Not so - sinking fund provisions are not options and an issuer who doesn’t comply with the sinking fund provisions is in default.
Trogdor Wrote: ------------------------------------------------------- > You sure it’s a credit risk, not an > interest rate risk that is being managed? yes according to CFAI text
Yep