A sinking-fund debenture is a financial instrument that companies can use to raise funds. It is a type of debenture that mandates the company to allocate a portion of its annual profits towards debt repayment. This portion is known as a sinking fund, which is utilised to gradually repurchase the debentures and decrease the company’s debt load. Investors perceive this debenture as less risky due to its inherent mechanism for debt repayment.
Sinking-fund debentures are a type of debt that mandates the issuer to allocate funds into a sinking fund to repay the debt when it matures. The sinking fund is a dedicated account that collects funds over time to ensure the issuer has sufficient funds to repay the debenture at maturity. For instance, if Company A issues $1 million in sinking-fund debentures with a 10-year maturity, the terms of the debenture would require the company to contribute $100,000 annually to a sinking fund. After 10 years, the sinking fund would have accumulated $1 million, which would then be used to repay the debenture. This example demonstrates the functioning of sinking-fund debentures. By mandating the issuer to set aside funds in a sinking fund, investors are more likely to receive their principal back at maturity, making sinking-fund debentures less risky than other types of debt securities.
A sinking fund debenture is a type of bond issued by a company or government that requires the issuer to set aside funds periodically to repay the bondholders at maturity.
The issuer of a sinking fund debenture makes regular payments into a sinking fund, which is used to retire a portion of the outstanding debt each year. This reduces the amount of principal that needs to be repaid at maturity.
Investing in sinking fund debentures can provide a steady income stream for investors, as well as a degree of security due to the regular payments into the sinking fund.
Sinking fund debentures are generally considered to be a relatively safe investment, as the regular payments into the sinking fund reduce the risk of default.
If the issuer fails to make payments into the sinking fund as required, it may be considered a default on the debenture, and bondholders may have the right to take legal action to enforce the terms of the bond.
Some sinking fund debentures may have a call provision, which allows the issuer to redeem the bonds before maturity. This can be a risk for investors, as it may result in a lower return than expected.
Sinking fund debentures differ from regular bonds in that they require the issuer to make regular payments into a sinking fund, which is used to retire a portion of the debt each year.
Sinking fund debentures typically have a term of 10 to 30 years, although the specific term can vary depending on the issuer.
Sinking fund debentures can be traded on the secondary market, allowing investors to buy and sell them before maturity.
Sinking fund debentures can be purchased through a broker or financial institution that offers bond trading services. It’s important to carefully consider the terms and risks of the debenture before investing.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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