Types of Sinking Funds
The below table provides a concise overview of the different types of sinking funds, their explanations, typical usage scenarios, and examples.
Types of Sinking Funds |
Explanation |
Usage |
Example |
---|---|---|---|
Specific Purpose Sinking Fund |
Established for a precise objective. | Funds are dedicated exclusively to a particular purpose. | A company creates a specific purpose sinking fund to finance the construction of a new manufacturing facility. |
Regular Payment Sinking Fund |
Facilitates regular payments to specific entities. | Ensures consistent and systematic payments over time, promoting financial stability. | A corporation sets up a regular payment sinking fund to meet periodic interest payments on issued bonds. |
Purchase Back Sinking Fund |
Utilized for the repurchase of bonds, offering flexibility in acquisition methods. | Bonds can be bought at prevailing market prices or at sinking fund prices. | An organization strategically uses the purchase back sinking fund to buy its bonds at advantageous prices, optimizing financial resources. |
Callable Bond Sinking Fund |
Tailored for callable bonds with the option to redeem or call back at a predetermined price. | The sinking fund’s purpose is determined by business needs and the specific call price associated with callable bonds. | A corporation issues callable bonds and establishes a sinking fund to efficiently manage early repayment based on financial considerations. |
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