The Pricing of Commodity‐Linked Bonds

DURING 1980 SUNSHINE MINING Co., operator of the largest silver mine in the United States, made two $25 million bond issues backed by silver. Each $1000 bond is linked to 50 ounces of silver, pays a coupon rate of 81/2% and has a maturity of 15 years. At maturity the company promises to pay the bondholders either the $1000 face value or the market value of the 50 ounces of silver, whichever is greater.' At the time of the first issue in April 1980, silver was trading at $16 an ounce so that the value of 50 ounces was $800. In August of 1979, an agency of the Mexican Government issued bonds in local currency backed by oil. Each 1,000 pesos bond was linked to 1.95354 barrels of oil, had a coupon rate of 12.65823% and a maturity of three years. At maturity they would be redeemed at face value plus the amount by which the market value of the reference oil bundle exceeded the face value plus all coupons received during the life of the bond, if this amount were positive. This was the third successful issue of 'petrobonds' by the Mexican agency. These are two recent examples of a corporation or government seeking funds in financial markets and being willing to share the potential price appreciation of the underlying commodity with the purchaser of the bond, in exchange for a lower coupon rate, more favorable bond indentures or the acceptance of a weaker currency by foreign investors. In both cases, the underlying commodity was produced by the issuing firm or country. In early references to the potential use of commodity-linked bonds by less developed countries, Lessard [1977a, 1977b, 1979] had suggested that producers could transfer a substantial proportion of