Sinking fund
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2012 by Marty J.Schmidt. Revised 12 March 2012.
The Meaning of Sinking Fund
The term sinking fund refers to assets and their earnings earmarked for the retirement of bonds or other long-term liabilities. A sinking fund may be thought of as a savings account, created and funded periodically for the express purpose of making sure that the company or government organization can retire its debt.
In principle, the reasons for establishing sinking funds sound reasonable and prudent, but in reality, sinking funds in many organizations have to compete with other funding requests each budgetary period. Sinking funds fail to meet their purpose when they do not receive top funding priority, or when the fund is set up so that management can "raid" the fund for other purposes.
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