Definition
The financial accounting term bond sinking fund is used to describe cash that is set aside by a company, which is to be used to repay money owed to bondholders. A bond sinking fund is typically overseen by a trustee, who is responsible for the repurchasing of maturing bonds on the open market.
Explanation
Bond sinking funds can be used by companies in several ways. The money can be utilized to repurchase maturing bonds; alternatively, the money can be used when an option on a callable bond is exercised.
Bond sinking funds also allow companies to lower their interest rate risk. When interest rates are declining, the money in the sinking fund can be used to repurchase bonds, and then reissue securities at more attractive rates.
Creditors, investors, and companies benefit from the creation of a sinking fund. By taking a disciplined approach and directing money to these funds, the likelihood of default on the corresponding bonds is lowered. Companies are oftentimes rewarded for lowering this risk, since investors will be willing to accept a lower rate of interest because of this fund.
Since the money in the sinking fund is not available to pay current assets, it typically appears in the asset section of the balance sheet in the category of long-term investments. Any interest earned on money placed in the sinking fund is recorded as revenue to the corporation.
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorJanuary 8th, 2024
The financial accounting term current assets is generally defined as cash and other assets that can be converted into cash within one year or one operating cycle, whichever is longer. Current assets are a subcategory of assets, which appear on a company's balance sheet.Moneyzine EditorJanuary 12th, 2024- The financial accounting term revenue is used to describe the price charged to customers for good sold, or services rendered. Revenues are reported on a company's income statement.Moneyzine EditorSeptember 21st, 2023
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Issuing long-term bonds represents an important source of financing for many large companies. The accounting term bond payable is used to categorize the payments due when a company issues an indenture or enters into a contract that represents a promise to pay. Since bonds payable represent a long term obligation of the company, they are shown in the long term liabilities section of the balance sheet.Moneyzine EditorJanuary 9th, 2024
The term debenture bond refers to debt issued by a company that is not secured by collateral. Debenture bonds are a source of capital and would appear as liabilities of the company on the balance sheet.Moneyzine EditorSeptember 19th, 2023- The financial accounting term restricted cash and compensating balances refers to monies that are reserved and not generally available to the company. Restricted cash can include minimum balances on bank accounts, while compensating balances include money needed to repay a loan.Moneyzine EditorSeptember 21st, 2023
- The term special funds refers to those assets set aside by companies for a specific purpose, and unavailable for ordinary business operations. Special funds include cash set aside to meet a specific financial obligation in the near term, as well as those that might appear in the long-term investment section of the balance sheet.Moneyzine EditorSeptember 21st, 2023
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