Sinking Fund Provision Definition
The sinking fund payments are generally a percentage of all outstanding debt and the issuer can apply the funds to one or more particular issues of its choice.
Sinking fund provision definition. These sinking funds are usually called aggregate sinking funds or blanket sinking funds. The fund gives bond investors an added element of security. A sinking fund provision will be disclosed in the indenture. To illustrate the concept more clearly let us consider a franchisee of 7 eleven who issues 50000 worth of bonds with a sinking fund provision and establishes a sinking fund wherein the franchisee regularly deposits 500 with the intent of using it to buy back bonds slowly before they mature.
If you have ever seen a company issuing bonds you may have known about sinking fund provision. In bonds with such a provision a fund or account is set up into which an issuer deposits money on a regular basis to repay the bond when it matures. See refunding risk and callable bond. Sinking fund provision a provision in some bond indentures requiring the issuer to put money aside to repay bondholders at maturity.
A sinking fund is an account that is used to deposit and save money to repay a debt or replace a wasting asset in the future. The requirement for some bond issuers that makes them buy back some of the debt at regualr time intervals. See refunding risk and callable bond. In other words its like a savings account that you deposit money in regularly and can only be used for a set purpose.
To understand this lets take a simple sinking fund example of how we plan to purchase something at the end of a year. A sinking fund is an account a corporation uses to set aside money earmarked to pay off the debt from a bond or other debt issue. To understand how a sinking fund works lets assume company xyz issues 10 million of bonds that mature in 10 years. The sinking fund provision requires that xyz retire 25 million in each of the years 1997 to 2000.
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