Querist : Anonymous
This type of fund is most commonly used when companies issue corporate bonds. When a company issues a corporate bonds, they have to make regular interest payments to the bondholders. Most of the time, companies can afford to make these small regular payments to the bondholders. However, when it comes time to pay back the principal of the bond, they may not have enough cash on hand. The purpose of the sinking fund is to accumulate enough cash so that a company will be able to repay the debt at the end of the bond term. Many times, as companies accumulate extra cash in the sinking fund, they will go ahead and purchase some of the bonds in advance of maturation.