A provision allowing a bond issuer the opportunity to buy outstanding bonds from bondholders for a set rate, using money from the issuer's earnings saved specifically for security buybacks. Because it adds doubt for investors over whether the bond will continue to pay until its maturity date, a sinking fund call is seen as an additional risk for investors.
|||Securities that have a sinking fund call provision provide higher yields to make up for the additional risk associated with holding them. Also, if the bonds are called, the call price is usually paid at a premium.
Borrowers who opt to have a sinking fund call mitigate interest rate risk, allowing for the opportunity to buy back outstanding securities and issue new ones with lower interest rates.
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