hard · Debt Capital Markets bond-instruments-structures

In a rising-rate environment where the bonds trade below par, how does the open-market-purchase delivery option affect the sinker's value to the holder relative to the bullet?

1. It is a short option to the holder: when the bond trades below par the issuer satisfies the sinker by buying cheap bonds in the market rather than calling at par, so the holder loses the par redemption they would have received under lot-based redemption.
2. It is a long option to the holder: the issuer must call bonds at par each year, so below-par holders are redeemed at par and capture a guaranteed gain versus the market price.
3. It is value-neutral to the holder because mandatory sinking-fund redemption amounts are fixed in advance, so the method of delivery cannot change the cash flows any individual holder receives.
4. It shortens the bond's effective duration and is therefore unambiguously beneficial to the holder in a rising-rate environment regardless of how the sinker is satisfied.

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