Investor's wiki

Purchase Fund

Purchase Fund

What Is a Purchase Fund?

A purchase fund is a feature of some bond agreements and preferred stock that requires the issuer to try to purchase a predetermined amount of securities in the event that they fall below a stipulated price (for the most part par value).

Par value is a term that frequently portrays a bond, however can likewise apply to a stock. Par value is the face value of a bond. It is the principal amount that the lender, or investor, is lending to the borrower, or issuer.

A purchase fund is like a sinking fund provision. A sinking fund is framed by periodically setting money to the side to ultimately pay back a debt or supplant an asset that has depreciated.

The purchase fund can be an advantage to investors in the event that the fund is trading below par value on the grounds that the company must pay par to repurchase the bonds.

Purchase Fund Explained

A purchase fund is a fund that is just utilized by the issuers to buy stocks or bonds when those securities have fallen below the original dollar amount assigned by the issuer. This type of fund can be beneficial to an investor in that assuming the fund is trading below par value, the company needs to pay par value to repurchase the bonds from the investors. On the off chance that the prices fall, the fund permits the company to recover its securities at a discount. This redemption fund cuts the risk that the company will not be able to reclaim its bonds at maturity.

A purchase fund is like a sinking fund provision, with a couple of key differences. A sinking fund is a means of repaying funds borrowed through a bond issue. The funds are reimbursed through periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market. As opposed to the issuer repaying the whole principal of a bond issue on the maturity date, another company buys back a portion of the issue every year and generally at fixed par value or at the current market value of the bonds, whichever is less. A sinking fund adds safety to a corporate bond issue. They can be found in preferred stocks, cash or different bonds.

What Is Par Value?

Par value is the face value of a security. The par value of bonds is commonly higher than that of stocks and can fluctuate in light of whether it is a corporate bond, municipal bond, or a federal bond. Commonly a corporate bond has a $1,000 face value, while a municipal bond regularly has a $5,000 face value and a federal bond has a $10,000 face value.

A company could issue $1,000,000 bonds by giving 1,000 bonds at $1,000. At the point when the bond matures, the borrower will pay back the face value, in this case, $1,000, to the lender.

The par value of stocks is ordinarily small and genuinely erratic, for example, one penny for each share. The preferred stock will some of the time have a higher par value since computing dividends is utilized.

Real World Example

Suppose the shipping company Rev chooses to issue $20 million of bonds that are due to mature in 10 years. In the event that Rev has a purchase fund, they may be required to retire a certain amount in bonds every year for quite a long time, maybe $2 million every year. To retire those bonds, Rev must deposit $2 million every year into a purchase fund. That purchase fund must be separate from Rev's operating funds and utilized only to retire debt. By utilizing this strategy, Rev can guarantee it will pay off the $20 million of every 10 years.

Features

  • A purchase fund is utilized to buy securities when their value has fallen below the original dollar amount assigned by the issuer.
  • A purchase fund can benefit an investor in that in the event that the fund falls below par value, the company needs to pay par value to repurchase the bonds from the investor.
  • The fund is like a sinking fund provision, in which money is periodically set to the side to pay back a debt or supplant a weak asset.