Sinking fund provision - Financial definition
Concise definition of the term sinking fund provision
A sinking fund provision is a provision contained in a corporate bond’s indenture that specifies that a part of the bond issue must be retired each year.
Comprehensive definition of the term sinking fund provision
Basically, the sinking fund is created to make it easier to pay off the bond issue and to ensure that a default won’t happen because there is a sufficient amount of money available to repay the debt.
Though most bonds take several years to mature, it is always easier and more convenient to be able to reduce the principal amount long before it matures, consequently lowering credit risk.