Bond Features and Pricing: Sinking Funds, Call Provisions, and Price Types

Sinking fund

An account managed by the bond trustee for early bond redemption.

Call provision

An agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity.

Call premium

The amount by which the call price exceeds the par value of a bond.

Deferred call provision

A call provision prohibiting the company from redeeming a bond prior to a certain date.

Call-protected

A bond that, during a certain period, cannot be redeemed by the issuer.

Protective Covenant

A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest.

Zero coupon bonds

A bond that makes no coupon payments and is thus initially priced at a deep discount.

Bid

The price a dealer is willing to pay for a security.

Asked price

The price a dealer is willing to take for security.

Bid ask spread

The difference between the bid price and the asked price.

Clean price

The price of a bond net of accrued interest; this is the price that is typically quoted.

Dirty price

The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays.