Why is holding a bond with a sinking fund obligation a disadvantage - ProProfs Discuss
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Why is holding a bond with a sinking fund obligation a disadvantage to investors?

Asked by Lucy, Last updated: Oct 13, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

If westcoast energy buys back any of its debentures, as an example, and thepurchase is not done through the sinking fund, the company can turn over those bondsto the trustee. when the trustee receives those debentures, they reduce the overallobligation of shares that must be retired, thereby reducing their sinking fundrequirement. the debentures must be of the same issue in order to retire them.imagine you and your friend each invested in westcoast energy, and the companywas trying to retire the debt. and imagine that you didnt want to sell your debenturesbut your friend did. if westcoast energy chose to buy bonds in the market, they couldbuy your friends but not yours. your friend sells and you hold on to your investmentand everyone is happy. but what if, rather than buy the bonds in the market frominterested sellers, westcoast energy decided to call the bonds. both you and yourfriend could lose your investments. your friend wouldnt be unhappy because he orshe wanted to sell anyway. but you didnt want to lose your investment.unfortunately, when your bonds are called, you dont have a choice but to give themup. thats a disadvantage to you as an investor.
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