Question

How does a sinking fund work? Do bond investors prefer the bond issuer set up a sinking fund or not? Why?

Answer 1

Sinking fund is a fund which will be providing additional security to the bondholder because the company will be trying to to place a proportional amount of money into that fund in order to discharge the debt at the maturity. This fund is made for discharging of the liability of the company at the maturity of bonds.

Bond investor will definitely want the bond issuer to put up a sinking fund because it will help them in order to protect with their loan to the company because they want that they should be repaid back at the maturity and sinking fund is a fund which is made for the payment at the maturity and Hence, Bond investor will always want the company to put up with a sinking fund.