Sinking fund

A sinking fund is a series of regular payments to provide for the orderly retirement (payoff) of a bond issue. Sinking- fund provisions may call for the annual retirement of a portion of a bond issue or may call for annual deposits into a fund, often managed by a trustee, which will accrue to the amount sufficient to retire the BONDS at their maturity. Designed as protection for bondholders, sinking funds are a drain on a firm’s cash and can be disastrous for firms with cash-flow problems. Failure to meet sinking-fund provisions causes the bonds to be in DEFAULT, which, in turn can lead to insolvency and bankruptcy (see BUSINESS FAILURE).