What is a sinking fund?

It is a fund set aside as a means to repay funds borrowed through a bond issue. The issuer makes periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market. Rather than the issuer repaying the entire principal of a bond issue on the maturity date, another company buys back a portion of the issue annually, and usually at fixed par value or at the current market value of the bonds, whichever is less. From the investor’s point of view, a sinking fund adds safety to a corporate bond issue: with it, the issuing company is less likely to default on repayment.