Abstract
This study analyzes the effect that two options created by the inclusion of a sinking fund clause in a bond indenture have on the bond issue's secondary market risk premium. The impact of market prices that exceed current sinking fund redemption prices, and of par versus premium redemption, is clearly apparent when a set of issue‐specific and macroeconomic control variables are incorporated into a model of bond risk premia. Thus, secondary market prices for the large‐volume utility bond transactions in the sample reflect knowledge of individual‐issue, time‐varying indenture characteristics.
