Many older bond issues with low coupons by today’s standards are now entering their sinking fund period, enabling issuers to repurchase their “sinkers” at substantial discounts in the marketplace, rather than call them by lot at par.

When current market rates exceed the coupon rate on the bond, the present value of the bonds to investors decreases after each lot is called. The issuer always has an advantage over the investor because the issuer can choose to retire its purchases at the earliest possible sinking fund date. This advantage drives the stable price to the value of the longest maturity bonds. Although investors may band together in an effort to force the issuer to pay a higher price, it will always pay one or more of them to break the collusion.

Some issuers find, however, that their bonds have been “collected” by investors who can demand par because there is no other seller. A collector can offer more than the present value of the last sinker but less than the average value of all the sinkers, acquire the entire issue and then hold out for a price from the issuer equal to the average value of the sinkers. On the other hand, the issuer can always outbid a collector at prices that will reduce the issuer’s cost. Ideally, the issuer should be active in the market at prices just high enough to discourage collecting.

Even if an issuer will only break even by repurchasing its bonds, it may still find it profitable to do so because of tax considerations. The Internal Revenue Code permits a taxpayer who repurchases his debts at a discount to credit his gain on repurchase to the basis of his assets, rather than to taxable income. Both investors and corporate issuers can benefit from a better understanding of the sinking fund bond game.