On p.251 of reading 62, two options for sinking fund provision are listed: Issuer can: 1. pay cash to the trustee , who then holds a lottery 2. buy bonds in the open market and give them to the trustee Can someone elaborate on the 2nd option? It makes rather vague sense.
Ifyou need to retire 10% of the bonds, you can just go buy them from your friendly neighborhood bond dealer and turn them over to the trustee. He puts them in the paper shredder and that’s that.
I see, just buying them and shredding yourself wouldn’t work? That means trustee does all the ‘book-keeping’?
a related, question… since sinking fund provision refers to redeeming back bonds AT PAR (is this compulsory?), how could you purchase them on the open market at par? Wouldn’t you be incurring loss, since you’d be buying them at market prices and then handing over to trustee?
econ123 Wrote: ------------------------------------------------------- > I see, just buying them and shredding yourself > wouldn’t work? That means trustee does all the > ‘book-keeping’? Trustee must certify you have complied with provisions. If you just tell him “Uh, sure Joe. I trashed them” he can’t certify it.
econ123 Wrote: ------------------------------------------------------- > a related, question… since sinking fund > provision refers to redeeming back bonds AT PAR > (is this compulsory?), how could you purchase them > on the open market at par? > > Wouldn’t you be incurring loss, since you’d be > buying them at market prices and then handing over > to trustee? No - sinking fund says you have to retire them. If they are cheaper in the market than par, you should buy them in the market.
I suppose the issuer buy back bonds in the market at 98. Then the trustee, in return, retire them by (1) paying cash to bondholder at 98 (or at par?) or by (2) other ways? When the issuer deliver bonds to the trustee, whether or not the trustee retire them immediately?
CFA_ABC Wrote: ------------------------------------------------------- > I suppose the issuer buy back bonds in the market > at 98. Then the trustee, in return, retire them by > (1) paying cash to bondholder at 98 (or at par?) > or by (2) other ways? > The issuer buys back the bonds in the market and now the issuer and the bondholder are the same person (company, whatever). The trsutee doesn’t have to pay anyone. > When the issuer deliver bonds to the trustee, > whether or not the trustee retire them > immediately? There really isn’t much to do for the trustee to retire the bonds. It’s about as difficult as disposing of a dead cat.
Thank you so much, Joey! So sorry for my extremely silly question. 