sinking fund

(noun)

A sinking fund is a fund established by a government agency or business for the purpose of reducing debt by repaying or purchasing outstanding loans and securities held against the entity. It helps keep the borrower liquid so it can repay the bondholder.

Examples of sinking fund in the following topics:

  • Sinking Funds

    • A sinking fund is a method by which an organization sets aside money to retire debts.
    • A sinking fund may operate in one or more of the following ways:
    • Thus the balance sheet consists of Asset = Sinking fund, Liability = Bonds
    • One purpose of a sinking fund is to repurchase outstanding bonds.
    • Describe how a sinking fund operates in regards to a bond issue

  • Deciding to Refund Bonds

    • The sinking fund has accumulated enough money to retire the bond issue.

  • The Cost of Debt

  • Market Actors

    • Investors can include: pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, and hedge funds.
    • A pension fund is any plan, fund, or scheme that provides retirement income.
    • Hedge funds are not considered a type of mutual fund.
    • Open-end funds are most common, but exchange-traded funds have been gaining in popularity.
    • A hedge fund is an fund that can undertake a wider range of investment and trading activities than other funds.

  • Investment Institutions

    • Investment institutions include mutual funds and finance companies.A mutual fund manager groups together funds from many investors and invests the money in a variety of stocks.Consequently, a mutual fund diversifies stocks, and it lowers investors' risk.For example, you start your own mutual fund and offer investors a chance to invest in this fund.You take the money and buy 30 different corporate stocks.The Coca-Cola stock rises one day while the value of IBM stock falls.Overall, the average of the fund's 30 stocks should earn a return to your fund and to the investors.If you bought only Kmart corporate stock, you would lose your investment if this company bankrupts.
    • Mutual fund companies have different strategies and characteristics, and well-known mutual fund companies include Fidelity, Vanguard, and Dreyfus.Mutual fund companies develop strategies where they only buy stock in certain industries, large companies, or foreign company's stock.Furthermore, the mutual fund company may issue a fixed number of shares to the fund that we call closed-end mutual funds.Then investors may buy and sell these shares inover-the-counter markets, just like stock.Thus, the mutual fund company does not buy its shares back for closed-end mutual funds.A mutual fund company may offer another alternative called open-ended mutual funds.Mutual fund company can buy back shares to the fund, and the price of the shares becomes tied to the value of the stock in the fund.Finally, the mutual fund managers use two methods to earn profits.First, fund managers charge management fees for no-load funds, usually 0.5% of asset value.For the second method, the fund managers charge a commission for selling or purchasing of shares for load funds.The load reflects the commission that lowers the fund's value.
    • Money-market mutual funds are similar to mutual funds.However, the fund manager buys only money market securities, and the fund excludes corporate stock.Theory behind money-market mutual funds is simple.If you have five friends with $2,000 each, and they want to buy a Treasury bill with a minimum face value of $10,000, then your friends can pool their money together and buy one T-bill.Once the T-bill matured, your friends split the interest among themselves.
    • Money-market mutual funds are very popular because these funds offer check-writing privileges, and some investors do not want to tie up their funds for a long time.Moreover, the value of the fund does not change much, when interest rates changes because money market securities have maturities less than one year.In 2008, money-market mutual funds had assets of $3.8 trillion.
    • Commercial banks offer money market deposit accounts that are similar to the money-market mutual fund.Two funds differ because the Federal Deposit Insurance Corporation (FDIC) insures the money market deposit accounts, while it does not insure money-market mutual funds.If your bank bankrupted and you invested in money market deposit accounts, subsequently, you are guaranteed not to lose you funds up to the maximum insured amount.

  • Purchase Process

    • Most individuals purchase bonds via a broker or through bond funds.
    • Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies, hedge funds, and banks.
    • Most individuals who want to own bonds purchase bonds via a broker or do so through bond funds.
    • Bond funds typically pay periodic dividends that include interest payments on the fund's underlying securities plus periodic realized capital appreciation.
    • Most bond funds pay out dividends more frequently than individual bonds.

  • Bond Prices in an Open Economy

    • Then money becomes the loanable funds.
    • Nevertheless,loanable funds switch the roles of supply and demand.
    • Therefore, they represent the demand function for loanable funds.
    • Equilibrium price in the loanable funds market is the interest rate while the equilibrium quantity is the amount of loanable funds.
    • Consequently, the analysis uses the loanable funds approach.

  • The Common Financial Instruments

  • Funding the International Business

    • Funding is the act of providing resources, usually money, or other items of value; there are many options for an international business.
    • The process of soliciting and gathering funds is known as fundraising.
    • In economics, funds are injected into the market as capital by lenders and taken up as loans by borrowers.
    • With-in company loans: a new company can raise funds only through external sources, such as shares, debentures, loans, public deposits, etc., but an existing firm which needs finance for its future growth and expansion can generate funds through retained earnings.
    • Shares are the most common form of raising long-term funds from the market.

  • Additional Funds Needed (AFN)

    • AFN is "additional funds needed," and refers to the additional resources that will be needed for a company to expand its operations.
    • AFN stands for "additional funds needed. " It is a concept used most commonly in business looking to expand operations and influence.
    • AFN is a way of calculating how much new funding will be required, so that the firm can realistically look at whether or not they will be able to generate the additional funding and therefore be able to achieve the higher sales level.
    • Determining the amount of external funding needed is a key part of calculating AFN.