Sinking Fund

Mandatory prepayments made by a borrower to redeem a certain amount of a bond issue, thus reducing the principal amount due at maturity. The prepayments are made regardless of price movements in the secondary market through payments to a special account. A bond agreement may also simply require the borrower to make regular payments into a sinking fund to assure investors that money will be available for redemption when the debt matures. More generally, money set aside by a company on a regular basis for a specific purpose, usually to repay future debt.

See also: Purchase Fund