Indexed Sinking Fund Debentures: Valuation and Analysis

John D. Finnerty

Financial Management, 1993, vol. 22, issue 2

Abstract: In July 1988, the Federal National Mortgage Association (FNMA) issued $500 million principal amount of 8.70% indexed sinking fund debentures (ISFDs). Five additional issues of ISFDs totaling $3.175 billion principal amount followed over the next 14 months. ISFDs contain an interest-rate-contingent sinking fund. The contingency feature works to the issuer's advantage because sinking fund payments accelerate when market interest rates drop and decelerate when interest rates rise. Mortgage prepayments exhibit a similar pattern. The FNMA had a $100 billion mortgage portfolio at year-end 1988. The sinking fund schedule of the ISFDs enables the FNMA to achieve a closer matching of the interest-rate sensitivities of the prices of its assets and liabilities than a conventional debt issue generally permits.

Date: 1993
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