The sinking fund definition is an accumulation of assets set aside to repay a loan when it becomes due. Use the accumulated amount to pay off the debt early to reduce the amount of liability for a company.
Use sinking funds to retire debt or set aside amounts to pay off the debt as it comes due. This means that a sinking fund’s only purpose is the payment of that obligation and nothing else. The assets set aside however may be set aside with the assumption that they will grow over time within the sinking funds account. At times there are sinking funds provisions within most loan agreements. A sinking funds provision often allows for discounted payment of debt. Often times the provision does not account for the entire amount in the loan which will last until maturity. The most common forms of instruments associated with sinking funds are callable bonds or other other option stocks.