What is a bond sinking fund?

Definition of Bond Sinking Fund

A bond sinking fund is a corporation's noncurrent asset that is restricted for the purpose of redeeming or buying back its bonds payable. Bonds that require a bond sinking fund will mean less risk for the bondholders.

The corporation is required to make regular deposits into the bond sinking fund, which is likely managed by an independent trustee. The combination of the required deposits plus the income and gains from the sinking fund's investments must be used to redeem or retire the corporation's bonds payable.

Example of Bond Sinking Fund

ABC Corporation is planning to issue $20 million of 20-year bonds. Potential investors are requiring that ABC establish a bond sinking fund into which ABC will make annual deposits of $500,000. An independent trustee will invest the corporation's annual deposits with the goal of the sinking fund balance growing to approximately $20 million by the time the bonds come due in 20 years.

The corporation will report the bond sinking fund balance in the investments section of its balance sheet. The investments section appears immediately after the current asset section.

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