sinking fund

Sinking Fund

A means of repaying funds borrowed through a bond issue. The issuer makes periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market.

Notes:

Rather than the issuer repaying the entire principal of a bond issue on the maturity date, another company buys back a portion of the issue annually and usually at a fixed par value or the current market value of the bonds, whichever is less. Should interest rates decline following a bond issue, sinking-fund provisions allow a firm to lessen the interest rate risk of their bonds as they essentially replace a portion of existing debt with lower-yielding bonds.

From an investor's point of view, a sinking fund adds safety to a corporate bond issue with it the issuing company is less likely to default on the repayment of the remaining principal upon maturity since the amount of the final repayment is substantially less. This added safety has impacts the interest rate at which the company is able to offer bonds in the marketplace.

See also: Bond, Interest Rate Risk, Par Value, Purchase Fund, Super Sinker

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Sinking fund

A fund to which money is added on a regular basis that is used to ensure investor confidence that promised payments will be made and that is used to redeem debt securities or preferred stock issues.

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sinking fund

The assets that are set aside for the redemption of stock, the retirement of debt, or the replacement of fixed assets.