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. Doubling Option

    A sinking fund provision that gives a bond issuer the right to ...
  6. Debt-Service Coverage Ratio - DSCR

    In corporate finance, it is the amount of cash flow available ...
RELATED FAQS
  1. What are the tax benefits of establishing a sinking fund?

    The primary tax benefit available through the creation of a sinking fund is a deduction for interest payments made. The other ... Read Full Answer >>
  2. In what ways can a sinking fund affect bond returns?

    The effective yield of a bond sinking fund to an investor should not be considered similar to a bond nonsinking fund. Both ... Read Full Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What does a climbing interest rate risk signify about the economy?

    Climbing interest rate risk typically signifies the economy is strong with considerable financial activity. When an economy ... 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. Savings

    Explaining Term Deposits

    A term deposit (more often called a certificate of deposit or CD) is a deposit account that is made for a specific period of time.
  6. Economics

    What's a Maturity Date?

    Maturity date is the final date when any remaining principal and any unpaid interest are due on a debt.
  7. Professionals

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  8. Stock Analysis

    Playing Rising Rates with Ultra-Short Term Bonds

    With rising rates likely, investors may want to consider adding a dose of ultra-short bonds to their portfolios. Here are some ETFs to consider.
  9. Economics

    Greece Isn’t The Only Problem U.S. Stocks Face

    Both stocks and bonds fell last week, due to several factors dampening investor sentiment. The most obvious one is the evolving situation in Greece.
  10. Professionals

    Why Investors Are Bailing on Bond ETFs

    Investors are fleeing bond ETFs. Should you follow the herd? Hint: It depends on the type of bond.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!