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Sinking Fund

Candlefocus Editor
A sinking fund is a pool of money set aside independently from a company's operating accounts that is used to retire a debt or bond prior to its maturity date. An investor may create a sinking fund to save up a fund from which it can pay off its debt or bond obligations generally as they come due. Sinking funds may also be used to buy back bonds issued by that same company on the open market which is known as a buyback program.

Sinking funds are commonly used by corporations, but can be used by any type of investor. The company may decide to put the funds into a separate account so the company is not tempted to use the money to pay for other activities before paying off debt or buying back its bonds. In addition, the company may invest the funds in a mix of investments, such as bonds and stocks, in order to get a good return on the money, while still having the funds available when needed.

For the bond issuer, a sinking fund helps to mitigate the risks associated with debt. This is because the issuer can essentially retire a portion of the bonds over time, rather than having to pay the entire amount on their maturity date. Moreover, if the issuer of a callable bond decides to use a sinking fund, they can let the fund build up, and if the conditions become more favorable to retire a portion of their debt early, they can call their bonds and save on future interest payments.

For the investor, investing in bonds that have a sinking fund may provide more certainty and stability. With a sinking fund, if the issuer fails to meet their obligations, the investor may still rely on the fund to be able to recover some of the invested capital.

Overall, the use of a sinking fund allows the issuer to manage their debt obligations so that their debt does not become a burden for them in the future. It enables a company to pay debt sooner and save money on interest expense. Likewise, it provides the investor with greater security by having the funds available to help recover their investments in the case of default.

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