A sinking fund adds an element of safety to a corporate bond issue for investors. Since there will be funds set aside to pay off the bonds at maturity, there's less likelihood of default on the money owed at maturity. In other words, the amount owed at maturity is substantially less if a sinking fund is established.

Is a sinking fund a good idea?

Some businesses also use the term sinking funds for planned expenses. When it comes to personal finances, a sinking fund is a great financial safety net. It keeps you out of debt, on budget, and on track for your financial goals.

Who benefits from a sinking fund?

A corporate sinking fund attracts investors because it provides a measure of protection to creditors. Sinking funds allow companies to control the amount of their debt through repayment or retirement of bonds. A small business with control over its debt is less likely to default on its bond obligations.