Definition of Sinking Fund

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.

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