© 2000 John Petroff
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© 2000 John Petroff |
2)- Provisions retiring bonds
The corporation will state in great
detail when and under what conditions each payment will be made,
especially the principal because that terminates the bond. Normally,
the principal would be paid at maturity. But that may be inconvenient
because the company would have to accumulate a large sum of money
that would be paid off in one single balloon payment. A balloon
payment may also be costly to the firm because the debt remains
outstanding even when it is no longer needed. So,
there are several methods of arranging repayment instead of a
balloon payment
a)- a sinking fund provision can stipulate
that a given number of bonds will be retired at par periodically
by choosing them either in a lottery system or by a prearranged
arithmetic system of serial numbers;
b)- a call provision can give the
right to the company to retire the entire issue or a portion thereof,
with often an inducement of a call premium to convince bondholders
to redeem their bonds.
While the sinking fund and the call provision do not necessarily benefit bondholders, they are desirable clauses to find in an indenture because they constitute one more form of reassurance that the company knows what it can, and wants to do.
See review questions Q-12D2.1 and Q-12D2.2.
See research assignment R-12D2.1.
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