Sinking fund

A sinking fund is a set-aside of cash that is to be used at a later date to retire bonds or other forms of debt or preferred stock. It may also be used to fund the replacement or purchase of an asset. By setting aside these funds, the financial burden associated with a repayment or asset purchase is greatly reduced. The existence of a sinking fund also reduces the risk for investors, who have an improved chance of being repaid. When a sinking fund is a required part of an investing agreement, investors are more likely to allow a reduced rate of interest on the associated debt or preferred stock. However, a sinking fund also reduces the availability of cash for the borrower, which limits its investment choices.

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Corporate Finance