sinking fund

A fund accumulated to pay off a corporate or public debt.

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 Says:
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.

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1. In general. Money accumulated in a custodial account to retire debt instruments according to a predetermined schedule, regardless of pricing changes in the secondary market. Some sinking fund requirements must be satisfied by redemption of a specific amount of the issue during a specified year. In other cases, the sinking fund requirement can be met through purchases of the issue in the open market.

2. Mortgage-backed securities. A provision in an Indenture calling for scheduled amortization of mortgage backed bonds, subject to prepayment activity. For example, a Controlled Amortization Bond tranche in a Collateralized Mortgage Obligation (CMO).

An account that, when compounded, will equal a specified sum after a specified time period. See Compound Interest.
Example: The Johnsons wish to buy a home 3 years from now. They estimate the Down Payment will equal $5,000. To accumulate the necessary money, they set up a sinking fund at the local bank. At 5% interest, the fund requires monthly deposits of $129. After 36 payments, the account will contain $5,000.

For more information on sinking fund, visit Britannica.com.

An accumulation, by a corporation or governmental body, of money invested for the purpose of repaying a debt or replacing equipment. In governmental bodies, a sinking fund is a fund arising from taxes, imposts or duties, appropriated toward the payment of interest due on a public loan and for the eventual payment of the principal. See 29 A. 387, 389. See also fund [sinking fund].

A fund into which companies or governments place money to redeem their bonds and other forms of indebtedness.

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