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.
- Browse Related Terms: Callable bond, Conversion price, Convertible bond, Deep discount bond, Exchange traded notes, Gilt-edged security, Indenture, Noncallable, Original issue discount, Par Value, Prerefunding, Redemption, Sinking fund, Zero-coupon bond, Zero-coupon convertible bond