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What is a bond sinking fund?

A bond sinking fund is a restricted asset of a corporation that was required to set aside money for redeeming or buying back some of its bonds payable. The bond sinking fund begins when the corporation deposits money with an independent trustee. The trustee then invests the money in order for the balance in the sinking fund to increase. The balance in the sinking fund will also grow from additional required deposits made by the corporation. The bond sinking fund decreases when the trustee purchases or redeems the corporation's bonds.

Not all corporations with bonds payable are required to have a bond sinking fund. However, bonds with sinking funds are likely to be viewed as less risky.

A bond sinking fund is reported on the bond issuer's balance sheet under the caption Investments, the first long-term (or noncurrent) asset section appearing immediately after current assets.