DEFINITION of 'Super Sinker'

A bond with long-term coupons but a potentially short maturity. A super sinker fund is most likely to be used in home financing, where there is a greater risk of bond prepayment. If the bond principal is paid before maturity – prepaid – bondholders receive the value of the principal back quickly. Super sinker bonds attract investors who want a brief maturity but also want longer-term interest rates.

BREAKING DOWN 'Super Sinker'

Mortgages and housing bonds carry a level of prepayment risk, since the homeowner may repay the value of the mortgage in full before the mortgage’s maturity date has been reached. This can happen if the homeowner sells the home, but can also arise if the homeowner refinances the mortgage at a lower rate.

When a super sinker is attached to a mortgage, it receives special treatment. A specifically identified bond maturity is selected to receive the prepayments, so all mortgage prepayments are applied to the super sinker first. This allows the bond to be retired faster than other bonds.

While the actual maturity of the super sinker may not be exactly known, investors can estimate the maturity based on past prepayments for similar mortgage profiles. Super sinkers are typically sold at par or at a discount, since the short duration makes paying a premium for the bond a relatively great risk.

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