Sinking Fund

AAA

DEFINITION of 'Sinking Fund'

A means of repaying funds that were 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.

INVESTOPEDIA EXPLAINS 'Sinking Fund'

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 at 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 its bonds as it essentially replaces a portion of existing debt with lower-yielding bonds.

From the 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 affects the interest rate at which the company is able to offer bonds in the marketplace.

VIDEO

Loading the player...
RELATED TERMS
  1. Super Sinker

    A bond with long-term coupons but a potentially short maturity. ...
  2. Par Value

    The face value of a bond. Par value for a share refers to the ...
  3. Sinkable Bond

    A bond issue that is backed by a fund, called a sinking fund, ...
  4. Yield To Worst - YTW

    The lowest potential yield that can be received on a bond without ...
  5. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  6. Corporate Bond

    A debt security issued by a corporation and sold to investors. ...
RELATED FAQS
  1. What is the difference between interest coverage ratio and DSCR?

    The amount of debt a company is responsible for is an important factor when assessing its relative strength and financial ... Read Full Answer >>
  2. Can a church issue a bond?

    The North American Securities Administrators Association (NASAA) has acknowledged that "church bonds" are allowed to be issued ... Read Full Answer >>
  3. I have discovered that a bond I am interested in has a sinking fund. What does this ...

    First, understand that a sinking fund provision is really just a pool of money set aside by a corporation to help repay a ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Sinking Fund

    A sinking fund is a way for companies to pay off part of their bond issue before it reaches maturity. By eliminating its debt gradually, the bond issuer is more likely to attract investors concerned ...
  2. Investing

    The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.
  3. Bonds & Fixed Income

    Convertible Bonds: An Introduction

    Find out about the nuts and bolts, pros and cons of investing in bonds.
  4. Bonds & Fixed Income

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  5. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  6. Bonds & Fixed Income

    How to Diversify with Muni Bond ETFs

    Thinking of diversifying with bonds? Consider these muni bond ETFs.
  7. Bonds & Fixed Income

    Should Junk Bond ETFs Be a Part of Your Portfolio?

    Should junk bonds be a part of your portfolio? Here's what you need to know.
  8. Mutual Funds & ETFs

    How To Build A Bond Ladder?

    Bond laddering is a strategy used when building a portfolio: an investor can spread out interest rate risk and create a stream of cash flows for income.
  9. Investing Basics

    Explaining Interest Rate Risk

    Interest rate risk is the risk that investments already held will lose market value if new investments with higher interest rates enter the market.
  10. Investing Basics

    What is an Asset Class?

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center