What is a sinking fund?

• A. A reserve set aside to pay off debt at maturity.
• B. A specialized fund for classroom technology purchases.
• C. A fee charged on new bonds.
• D. A separate fund for capital projects.

Answer: (A)

A sinking fund is a reserve built up over time to ensure that debt—usually bonds—can be repaid at maturity. The issuer makes regular deposits into this fund (or relies on the fund’s investment earnings) so there’s enough money when the bonds come due to redeem the principal. This approach reduces default risk and can improve the issuer’s credit profile by showing a dedicated plan to retire the debt. It isn’t a fund for classroom technology purchases, not a fee charged on new bonds, and not simply a separate fund for capital projects.