fund set aside for periodic payments, aimed at reducing or amortizing a financial obligation. A bond with a sinking fund provision is an example. The issuer makes periodic payments to the trustee, who can retire part of the issue by purchasing the bonds in the open market. The trustee, can invest the cash deposited periodically in the sinking fund in income-producing securities. The objective is to accumulate investments and investment income sufficient to retire the bonds at their maturity. A sinking fund may be established for other purposes such as for plant expansion.
- In general. Money accumulated in a custodial account to retire debt instruments according to a predetermined schedule, regardless of pricing changes in the secondary market. Some sinking fund requirements must be satisfied by redemption of a specific amount of the issue during a specified year. In other cases, the sinking fund requirement can be met through purchases of the issue in the open market.
- Mortgage-backed securities. A provision in an indenture calling for scheduled amortization of mortgage backed bonds, subject to prepayment activity. For example, a Controlled Amortization Bond tranche in a Collateralized Mortgage Obligation (CMO).
money accumulated on a regular basis in a separate custodial account that is used to redeem debt securities or preferred stock issues. A bond indenture or preferred stock charter may specify that payments be made to a sinking fund, thus assuring investors that the issues are safer than bonds or preferred stocks, for which the issuer must make payment all at once, without the benefit of a sinking fund.
money accumulated on a regular basis in a separate custodial account that is used to redeem debt securities or preferred stock issues. A bond indenture or preferred stock charter may specify that payments be made to a sinking fund, thus assuring investors that the issues are safer than bonds (or preferred stocks) for which the issuer must make payment all at once, without the benefit of a sinking fund.
money set aside to pay for losses. Rather than buy insurance coverage for all potential losses, some businesses and individuals choose this form of self insurance to cover all or a portion of certain losses.
an account that, when compounded, will equal a specified sum after a specified time period.
Example: The Johnsons wish to buy a home 3 years from now. They estimate the down payment will equal $5,000. To accumulate the necessary money, they set up a sinking fund at the local bank. At 5% interest, the fund requires monthly deposits of $129. After 36 payments, the account will contain $5,000.
