A sinking fund is money set aside regularly over time to repay a debt or to pay for a large future cost, such as replacing an asset; in accounting and corporate finance, its main sense is the bond sinking fund, a restricted pool of assets that a company builds up to retire a particular bond issue. The main entry covers how bond sinking funds are structured and reported.
General and specific meanings
For bond issuers, the sinking fund requirement is written into the bond indenture. The company makes periodic payments, often to a trustee, which uses them either to buy back bonds in the market, to call a portion of the bonds at a set price, or to accumulate cash for repayment at maturity. This lowers the risk that the issuer cannot repay a large sum all at once. Early repayments of this kind are described under redemption of bonds payable.
In the wider sense, any fund built up in instalments for a known future payment can be called a sinking fund. Businesses may set aside money each year to replace machinery or vehicles. Owners' associations in apartment buildings often hold a sinking fund, also called a reserve fund, for major repairs such as roofs or lifts. In personal finance, people use the term for savings set aside for planned expenses such as a car or holiday, which differs from an emergency fund kept for unexpected costs.
The term dates back at least to the 18th century, when governments used sinking funds to repay national debt.