sinking fund investment & finance definition

A fund set up to repay a bond when it matures. Regular payments are made into the sinking fund so that when the bond matures, the bond issuer will have the money on hand to redeem the bonds. Depending on the specific terms of a sinking fund, the expected maturity of the bond may change slightly. For example, a sinking fund may require that a percentage of the bond issue be redeemed beginning in a certain year. In that case, the issuer would negotiate individually with bondholders to buy back bonds at an earlier date with the payment of a small premium.