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Simple English definitions for legal terms
sinking fund
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A quick definition of sinking fund:
A sinking fund is a special type of savings account where you put money aside regularly to pay off a big debt in the future. It's like saving up for a big purchase, but instead of buying something right away, you're saving up to pay off a loan or debt over time. The money you save in a sinking fund earns interest, which helps it grow faster. This way, when it's time to pay off the debt, you'll have enough money saved up to do it without having to borrow more money or go into debt again.A more thorough explanation:
A sinking fund is a type of fund that consists of regular deposits that are accumulated with interest to pay off a long-term corporate or public debt. This fund is used to ensure that there is enough money to pay off the debt when it becomes due.
For example, a company may set up a sinking fund to pay off a bond that will mature in 10 years. The company will make regular deposits into the fund, and the money will accumulate with interest. When the bond matures, the company will use the money in the sinking fund to pay off the debt.
Another example is a municipality setting up a sinking fund to pay off a long-term loan for a public project, such as a new school or road. The municipality will make regular deposits into the fund, and the money will accumulate with interest. When the loan becomes due, the municipality will use the money in the sinking fund to pay off the debt.
In summary, a sinking fund is a way to ensure that there is enough money to pay off a long-term debt when it becomes due. Regular deposits are made into the fund, and the money accumulates with interest until it is needed to pay off the debt.