To ensure there's money on hand to redeem a bond or preferred stock issue, a corporation may establish a separate custodial account, called a sinking fund, to which it adds money on a regular basis.
Or, the corporation may be required to establish such a fund to fulfill the terms of its issue. The existence of the fund allows the corporation to present its investments as safer than those issued by a corporation without comparable assets.
However, sinking fund assets may be used to call bonds before they mature, reducing the interest the bondholders expected to receive.
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- Callable bond, Convertible bond, Indenture, Noncallable, Par Value, Prerefunding, redemption
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