Definition for : Sinking fund

Some bonds are issued with a "sinking fund" mechanism whereby a portion of the issued bonds is acquired on a regular basis. Such purchase takes place at the lower of the then current Market price or the Par value. This mechanism reduces the Risk of default by the issuer, since the Bullet repayment becomes lower. It also allows the issuer to refinance its Debt over time therefore potentially benefiting from decreasing Interest rates.
(See Chapter 21 Other debt products of the Vernimmen)
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