a sinking fund is a way for companies to pay off part of their bond issue before it reaches maturity. by eliminating its debt gradually, the bond issuer is more likely to attract investors concerned about default risk. bud's by bethany, a flower wholesaler, issues 200 bonds worth $500 each that are due in five years. every year, the company pays $5,000 in interest to investors with flower ?. however, the company's management is concerned about a $100,000 principal payment that will come due in five years. the company regularly puts money into a sinking fund to spread out this expense. each year, bud's by bethany repurchases $10,000 of the bonds from the market. as a result, it only owes half of the total principal at the end of five years, $100,000 minus $50,000 sinking fund contributions equals $50,000 balance. when a business tries to pay off its debt ahead of schedule, there is always a chance that interest rates will drop, therefore, lifting its bonds above their original price. in many cases, the firm sinking fund provision shields it against this possibility with what's known as a call feature. this allows the firm to buy notes at either par value or the current market price whichever is lower. so, even if the company's bonds climb to $525, bud's by bethany is able to purchase a set quantity at $500 a piece. the bonds subject to call are chosen randomly based on their serial number. while this aspect of the bond issue helps the issuer, it represents a drawback for investors who may unwillingly have to sell back their notes at an unfavorable price. potential buyers should weigh this trade-off against the added security that a sinking fund provides. it's always a good idea to review the details of a sinking fund provision, before deciding whether a particular bond offering is right for you.
- sinking fund・・・減債基金