Bond Sinking Fund
What is a Bond Sinking Fund?
A bond sinking fund is where a corporation regularly buys back a portion of the bonds it has issued.
![bsf1](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf1.jpg)
How it Works
Typical Bond Issue
A company may want to embark on a major project.
![bsf2](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf2.jpg)
One way to raise money for this is via a bond issue.
![bsf3](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf3.jpg)
With a bond issue, the corporation sells bonds to investors.
![bsf4](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf4.jpg)
Each bond will have a certain face value.
![bsf5](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf5.jpg)
The investor pays this money to the corporation.
![bsf6](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf6.jpg)
In return, the corporation pays interest to investors over the bond term.
![bsf7](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf7.jpg)
Then, typically, at the end of the bond term, the corporation redeems the bond.
![bsf8](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf8.jpg)
This means they pay the whole of the bond’s face value to the bond holder at maturity.
![bsf9](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf9.jpg)
Sinking Fund
Alternatively, the corporation may use a bond sinking fund.
![bsf10](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf10.jpg)
With a sinking fund, the corporation takes money from revenue along the way.
![bsf11](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf11.jpg)
Then they deposit this money in the sinking fund.
![bsf12](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf12.jpg)
After this, they pass the money onto a trustee.
![bsf13](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf13.jpg)
The trustee then uses the money to buy back a portion of the outstanding bonds in the open market
![bsf14](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf14.jpg)
By doing this over and over, the corporation reduces its debt load over time.
![bsf14.5](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf14.5.jpg)
As a result, it is easier to redeem the remaining bonds at maturity.
![bsf16](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf16.jpg)
Having a sinking fund attached to the bond makes the bond more attractive to investors.
![bsf17](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf17.jpg)
The reduced repayment burden means there is less risk the corporation will default upon redemption.
![bsf18](https://seeaccountingnow.online/wp-content/uploads/2021/08/bsf18.jpg)
© R.J. Hickman 2020