The financial accounting term bond sinking fund is used to describe cash that is set aside by a company, which is to be used to repay money owed to bondholders. A bond sinking fund is typically overseen by a trustee, who is responsible for the repurchasing of maturing bonds on the open market.
Bond sinking funds can be used by companies in several ways. The money can be utilized to repurchase maturing bonds; alternatively, the money can be used when an option on a callable bond is exercised.
Bond sinking funds also allow companies to lower their interest rate risk. When interest rates are declining, the money in the sinking fund can be used to repurchase bonds, and then reissue securities at more attractive rates.
Creditors, investors, and companies benefit from the creation of a sinking fund. By taking a disciplined approach and directing money to these funds, the likelihood of default on the corresponding bonds is lowered. Companies are oftentimes rewarded for lowering this risk, since investors will be willing to accept a lower rate of interest because of this fund.
Since the money in the sinking fund is not available to pay current assets, it typically appears in the asset section of the balance sheet in the category of long-term investments. Any interest earned on money placed in the sinking fund is recorded as revenue to the corporation.