Sinking Fund Law and Legal Definition

A sinking fund is a sum periodically put aside from the income of a government or a business for the purpose of paying off a debt. A typical investment for a sinking fund is the purchase of the government’s or firm’s bonds that are to be paid off. Usually the fund is administered by a trustee.

A bond issue that is used as a means of repaying funds advanced is an example of a sinking fund. The issuer makes periodic payments to a trustee, who retires part of the issue by purchasing the bonds in the open market. Therefore, every period a company will pay back a portion of their bonds.