Definition
A sinking fund requires the issuer to set aside money periodically to retire a portion of bonds before final maturity. This reduces default risk by ensuring the issuer doesn't face a large balloon payment. Bonds may be repurchased in the market or called at predetermined prices through the sinking fund provision.
Example
A bond indenture requires retiring 5% of the issue annually via sinking fund, reducing principal from $100M to $50M over 10 years.
FAQ
What is Sinking Fund?
A fund set aside to gradually repay bond principal before maturity.
Why is Sinking Fund important?
Sinking Fund helps investors evaluate fixed income and make more informed decisions.