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Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Sinking Fund

Definition:

A company with bonds outstanding will buy back some of the bonds each year, gradually paying off the debt. They do this by handing over chunks of money to a trustee who uses the cash to buy some of the bonds on the open market.

Investors love sinking funds because the company is putting money toward the bonds, so it's much less likely that they'll default (not pay). Low risk = happy investor.

Example

Company X has $100 million a year in extra cash. It has 10 bonds outstanding, each with a $50 million face value. The company takes half of its free cash flow (that's $50 million a year) to buy back the bonds. On the company's balance sheet, that's one less debt. The company's financials look rosier already.