Sinking fund is an account established by an issuer of debt to place money for the exclusive purpose of paying bond principal.
Applying "Sinking Fund" to Securities Exams:
A sinking fund may be established to ensure that bondholders are paid their principal payments on a timely basis. A sinking fund may be established by both corporate issuers as well as by municipalities. The issuer may promises to establish a sinking fund as part of the indenture in an effort to market the bonds at a lower interest rate. If an investor is choosing between two issues of equal terms and one bond has a sinking fund, the bond with the sinking fund is the safer and more desirable investment.