Sinking Fund

A sinking fund is a bond which is paid off over time by the issuer (borrower) instead of a single final redemption at the end of the life of the bond; the maturity date. For example, a bond could be redeem in 20% increments over the last 5 years of the life of the bond. A sinking fund can be optional or mandatory.

Some municipal and corporate bonds are issued with a sinking fund provision.

The issuer does not need to be the company that buys back the tranches in a sinking fund. Another company can be tasked with this.

One of the main advantages for issuer an optional sinking fund bond is that a corporation can take advantage of lower interest rates if interest rates fall and hold onto the bond if interest rates climb.