What Is a Sinking Fund Provision?
Whenever an organization is trying to raise money for various projects they will often turn to the bond market to help them raise the funds they need. One way that some entities will try to make their issue more marketable to investors is to offer the sinking fund provision.
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Features
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A sinking fund is a stipulation to set aside a certain amount of money which will be used to help repay the debt of an organization over time.
History
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The sinking fund was first developed in England during the 18th century with the intention of repaying the redeemable public debt quickly.
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Options
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When an organization is using sinking fund they will have three different options these would include: repurchasing a percentage of the outstanding bonds, purchasing a fraction of the debt at a predetermined call price and to use the proceeds from the fund to pay down the entire debt at maturity.
Benefit
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The biggest advantage that a sinking fund offers to investors is more of a guarantee that they will be paid the money they loaned an organization because of this feature, resulting in a lower interest rate for the bond issue and more popularity among different investors.
Considerations
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Before investing in any kind of bond that offers various sinking funds protections it is prudent to read the sinking fund provisions. This will be useful in helping to determine if the different features of the fund will work well as part of an overall investment strategy involving a particular bond.
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