A sinking fund is created by the company to revoke the debt. This sinking fund is used to make payments to the investors when a company redeems the debt securities or a preferred stock. It is also helpful in redeeming burden of a company, to replace fixed assets, a redemption of stock etc. In sinking fund, money is regularly added constantly to assure the investor's confidence.
Sinking funds are generally used when a company issues a bond. The company has to pay an interest on the issued bonds to the bondholders and should pay interest from the profit, but the time comes when the company has to pay back the principal amount. At that time, the company uses a sinking fund.
So, the main purpose of a sinking fund is to pay the debt in time.
Types of sinking fund
1) Specific purpose sinking fund
In the specific sinking fund, a company uses this specific purpose sinking fund just to do that particular purpose and nothing else. So it is called specific purpose sinking fund.
2) Callable bond sinking fund
As the name describes a callable bond sinking fund means a sinking fund in which a company has a specific call price. So, a callable sinking fund is when needed.
3) Purchase back sinking fund.
A purchase back sinking fund is used when a company wants to purchase a bond back. A bond can be purchased from the bondholders at two prices, one is market price and the other one is at the sinking fund price.
4) Regular payment sinking fund
A regular payment sinking fund is used to make payment regularly to the trustee and many other.