What Is a Bond Sinking Fund?
Governments, corporations, and other lending institutions issue bonds, which are debt instruments that raise money by promising to repay a principal plus interest at a specific date. A bond sinking fund is a pool of money set aside to assist repaying the bond.
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Function
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Money from the sinking fund is used to pay off a portion of the bond debt each year. This reduces the financial burden for the bond holder.
Benefits
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Sinking funds help investors by reducing the risk of potential default when the bond reaches maturity.
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Considerations
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Sinking funds often have specific provisions stating the bond can be repurchased at periodic times throughout the bond's lifespan. This may allow the bond holder to repurchase at lower interest rates than the market value.
Warning
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Always review the provisions for any sinking fund to ensure the terms are clearly stated.
Fact
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In accounting, a bond sinking fund is reported after the current assets on balance sheets. Sinking funds are grouped with other long-term assets.
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References
- Photo Credit Image by Flickr.com, courtesy of Michael
