What is a sinking fund?
A sinking fund is a way of saving money to repay a debt or bond in the future. A company that borrows money will have to pay it back eventually, and the sinking fund makes it easier to afford a large payment. A sinking fund is created so the company can put money into the fund over the years until the bond's due date.
Reduced Risk of Default
A sinking fund makes a corporate bond issue safer for investors because it ensures that money will be available to pay off the bonds at maturity. Therefore, the amount due at maturity is much lower if a sinking fund is in place. This means that investors have some protection if the company goes bankrupt or defaults on its debt. A sinking fund also helps a company reduce the concern of default risk and, as a result, attracts more investors for their bond issuance.
A sinking fund reduces the risk of default and makes the bonds more secure so that the company can pay lower interest rates on them. This makes the company look more reliable and trustworthy, which can improve its credit ratings for its debt. Higher credit ratings attract more investors who want to buy the company's bonds, which is beneficial for the company when it needs to raise more money through debt or other obligations in the future