Question

Why might it be more accurate to describe a sinking fund as a bond redemption fund? please explain

Answer 1

A Sinking fund is a fund where money is periodically deposited with a trustee for repayment of bonds. The trustee keeps this pool of funds for purchasing bonds from the market as and when required. Hence Sinking fund is also a Bond redemption fund since the money kept aside is used for buying bonds from the open market which is similar to redemption of bonds on maturity.

Many companies set up Sinking fund to transfer money there as and when needed or periodically since it may be difficult to arrange the funds on maturity for redemption at one go. Hence Sinking fund helps in accumulation of funds periodically for redemption of bonds as and when needed.

Hence it is more accurate to describe a sinking fund as a bond redemption fund since purpose of sinking fund is to redeem the bonds