A purchase fund is a feature of some bond indentures and preferred stock that requires the issuer to make an effort to purchase a specified amount of securities if they fall below a stipulated price (usually par value).
Par value is a term that often describes a bond, but can also 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 similar to a sinking fund provision. A sinking fund is formed by periodically putting money aside to eventually pay back a debt or replace an asset that has depreciated.
The purchase fund can be an advantage to investors if the fund is trading below par value because the company must pay par to repurchase the bonds.
Key Takeaways
A purchase fund is used to buy securities when their value has fallen below the original dollar amount assigned by the issuer.
The fund is similar to a sinking fund provision, in which money is periodically set aside to pay back a debt or replace a failing asset.
A purchase fund can benefit an investor in that if the fund falls below par value, the company has to pay par value to repurchase the bonds from the investor.
Purchase Fund Explained
A purchase fund is a fund that is only used 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 if the fund is trading below par value, the company has to pay par value to repurchase the bonds from the investors. If the prices fall, the fund allows the company to redeem its securities at a discount. This redemption fund cuts the risk that the company will be unable to redeem its bonds at maturity.
A purchase fund is similar to a sinking fund provision, with a few key differences. A sinking fund is a means of repaying funds borrowed through a bond issue. The funds are repaid through periodic payments to a trustee who retires part of the issue by purchasing the bonds in theopen market. Rather than the issuer repaying the entire principal of a bond issue on thematurity date, another company buys back a portion of the issue annually and usually at fixedpar valueor 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 other bonds.
What Is Par Value?
Par value is the face value of a security. The par value of bonds is typically higher than that of stocks and can vary based on whether it is a corporate bond, municipal bond, or a federal bond. Typically a corporate bond has a $1,000 face value, while a municipal bond typically has a $5,000 face value and a federal bond has a $10,000 face value.
A company might issue $1,000,000 bonds by issuing 1,000 bonds at $1,000. 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 typically small and fairly arbitrary, such as one cent per share. The preferred stock will sometimes have a higher par value because it is used to calculate dividends.
Real World Example
Let's say the trucking company Rev decides to issue $20 million of bonds that are due to mature in 10 years. If Rev has a purchase fund, they might be required to retire a certain amount in bonds each year for 10 years, perhaps $2 million per year. To retire those bonds, Rev must deposit $2 million a year into a purchase fund. That purchase fund has to be separate from Rev's operating funds and used exclusively to retire debt. By using this strategy, Rev can guarantee it will pay off the $20 million in 10 years.
A purchase fund is used to buy securities when their value has fallen below the original dollar amount assigned by the issuer. The fund is similar to a sinking fund
sinking fund
A sinking fund is an account containing money set aside to pay off a debt or bond. Sinking funds may help pay off the debt at maturity or assist in buying back bonds on the open market. Callable bonds with sinking funds may be called back early removing future interest payments from the investor.
Mutual funds let you pool your money with other investors to "mutually" buy stocks, bonds, and other investments. They're run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them. You get exposure to all the investments in the fund and any income they generate.
Investments can include short-term U.S. Treasury securities, federal agency notes, Eurodollar deposits, repurchase agreements, certificates of deposit, corporate commercial paper, and obligations of states, cities, or other types of municipal agencies—depending on the focus of the fund.
Funds are collective investments, where your and other investors' money is pooled together and spread across a wide range of underlying investments, helping you spread your overall risk.
A purchase fund is a fund that is only used by the issuers to buy stocks or bonds when those securities have fallen below the original dollar amount assigned by the issuer.
The supplier sends the products to the customer. You then invoice your customer for the goods. The customer sends their payment directly to the financing company. After deducting their fees—which can be as high as 6% each month—the financing company sends you the remaining balance.
Mutual funds are popular because all the legwork of creating an optimally diversified portfolio is taken care of by the fund's managers. This intrinsic diversification makes mutual funds generally safer than investing in individual stocks.
The fund may earn interest and dividend payments from its holdings. The fund may earn capital gains from selling assets held in the fund at a profit. The fund may appreciate, meaning each fund share will grow in value over time.
Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't.
A money purchase scheme (also known as defined contribution) is a scheme where the final value depends on:the amount of contributions made by the member, their employer and any third party. the performance of the investments underlying the scheme.
Money market funds are a type of mutual fund that invests in low-risk, short-term debt securities, such as Treasury bills, municipal debt, or corporate bonds. They're designed to offer a safe, stable investment option for money you may need to access in the short term, like an emergency fund or a short-term goal.
Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.
A three-fund portfolio is an investment strategy that involves holding mutual funds or ETFs that invest in U.S. stocks, international stocks and bonds. The strategy is popular with followers of the late Vanguard founder John Bogle, who valued simplicity in investing and keeping investment costs low.
A fund is a pool of money that is allocated for a specific purpose. A fund can be established for many different purposes: a city government may set aside money to build a new civic center, a college may set aside money to award a scholarship, or an insurance company may set aside money to pay its customers' claims.
Purchased Funds consist of Due to Other Financial Institutions, Trading Liabilities, and Short-Term Borrowings. Noncore Deposits consist of Foreign Deposits, and time deposits greater than US $100,000.
Procurement appropriations are used to finance investment items, and should cover all costs necessary to deliver a useful end item intended for operational use or inventory.
A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds.
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