How does the sinking fund work? - ProProfs Discuss
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How does the sinking fund work?

Asked by Lola, Last updated: Jan 08, 2020

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

With a sinking fund, the issuer is obligated to retire a specific number of shares eachyear. they can do so in several ways. first, the issuer can call the bonds. by callingthe bonds, the investor has no choice but to give up his or her investment and receivecash based on some formula stipulated in the terms of the issuer. this is a realinconvenience since someone is basically ending the investors investment when he orshe didnt expect it. second, the issuer could buy shares from interested sellers in theopen market. this choice is easier on investors because those that are interested inselling their securities can sell them to the issuer, while those who are not interested inselling their securities are left alone.more recently, issuers make attempts to retire debt by purchasing the securities fromwilling sellers. and since the company is making this attempt to buy a lot of theirsecurities back, this additional buying in the market means more participation in thebuying/selling process. this means more liquid market, based on the explanation ofliquidity above.
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