Sinking funds provide for an orderly repayment of a bond issue, reduce the risk that the bond will not be repaid, and help to support the market price of the bond.
A sinking fund is a collection of funds that have been put up or saved to pay off bonds or debts. A corporation that issues debt will eventually have to pay that debt back, and the sinking fund lessens the burden of a significant outlay of revenue.
An economic entity creates a sinking fund by gradually withholding income in order to pay for long-term debt repayment or upcoming capital expenses.
Don't be misled by the phrase "sinking," which seems to be a bad thing. The word "sinking fund" is used in more conventional contexts to describe funds placed aside to pay off long-term debt, such as a bond. The phrase "sinking" probably alludes to the amount of debt that is still owed as time goes on.
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