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sinking fund is money taken from a corporation’s earnings that is used
to redeem bonds periodically, before maturity, as specified in the
indenture. It is a part of a bond indenture or preferred stock charter that requires the issuer to regularly set money aside in a separate custodial account for the exclusive purpose of redeeming the bonds or shares
Effect of these on Bonds
A call feature puts the investor at a disadvantage, callable bonds carry
higher yields than noncallable bonds, but higher yield alone is often
not enough to induce investors to buy them.
investor benefit of a sinking fund is that it lowers the risk of
default by reducing the amount of the corporation’s outstanding debt
over time. Another is that the fund provides price support to the issue,
particularly in a period of rising interest rates. However, the
disadvantage—which usually weighs more heavily on investors’ minds,
especially in a falling-rate environment—is that bondholders may receive
a sinking-fund call at a price (often par) that may be lower than the
current market price of the bonds.
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