The Impact of a Sinking Fund on the Firm's Cost of Debt

This study empirically investigates the relationship between the presence of a sinking fund and the offering yield for a large sample of bonds. Ferri's (1979) basic regression model is used to reveal that relationship for bonds issued in 1977, 1978, and 1979 which had more than 10 years to matu...

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Bibliographic Details
Published in:RBER, review of business and economic research review of business and economic research, 1982-04, Vol.17 (3), p.52
Main Authors: Lloyd, William P, Edmonds, Charles P
Format: Article
Language:English
Subjects:
Bonds
Capital costs
Financial management
Sinking funds
Statistical analysis
Yield
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Summary:This study empirically investigates the relationship between the presence of a sinking fund and the offering yield for a large sample of bonds. Ferri's (1979) basic regression model is used to reveal that relationship for bonds issued in 1977, 1978, and 1979 which had more than 10 years to maturity and were rated Baa or higher in Moody's Bond Survey. The results of the empirical tests are contrary to some commonly accepted assumptions, and when combined with Ferri's results, lead to the conclusion that the relationship between sinking funds and offering yields is relatively small but positive, especially during periods of high interest rates. This would be consistent with the concept of the sinking fund increasing the bond's call risk. However, this study did not categorize bonds by type, and there may be provisions in some indentures that result in a specific sinking fund having a greater or smaller impact on the offering yield.
ISSN:1058-3300
0362-7985
1873-5924