Sinking fund
A requirement to retire part of a bond issue each year, often by lot. Good for holders collectively, and a lottery for whoever is drawn.
Where you will meet it
Sinking fund appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain the ways a bond's principal can be paid back
“A sinking fund provision requires the issuer to retire a portion of the issue each year, often by lot, which reduces credit risk but exposes an individual holder to having their bond redeemed early at a price that may be below market.”
- Explain bonds and other debt securities that contain embedded options
“Sinking fund bonds make the issuer retire part of the issue over time; this reduces credit risk but the issuer's choice to call at par or buy in the market leaves holders with reinvestment risk.”
Practise it
Practise sinking fund until it is automatic: questions that explain every wrong option.
Take the free diagnostic →