sinking fund structures and putables provide, protect, periods, against, understand

Chuckrox8

sinking fund structures allow issuers to execute a series of partial calls prior to maturity. investors use bonds with sinking fund structures to help protect against rising rates as a portion of the calls are mandatory. Thus this bonds may outperform bullets and callables during periods of rising rates.

putables are bonds where investors have a put option to demand full repayment at par. put structures provide investors with a defence against sharp increses in interst rates.


don understand1) why sinking fund structures help protect against rising rates
2) why putables provide investors with a defence against sharp increses in interst rates.
because if interest sink, putables will be putted, and what has this to do with increases in interst rates?

mcmc

for puts you are thinking of it backwards- you are thinking of calls. a put allows the investor, not the issuer, the ability to put the bond back to the issuer and get paid at par usually.
so let's say your bond was at par, 100. interest rates rise. now your bond is worth 95 if it were non-callable. a puttable bond you are able to cash about and put to the issuer and get paid your 100. make sense?

sinking fund- bond is worth 100. every year in the sinking fund the co. retires part of the bond, usually at par. keep this example going.... maybe after year 1 it's only 10% retired, but you retire it at 100 when the bond is worth 95 and the kicker- interest rates have risen so guess how your reinvestment of that cash is looking? pretty good.