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A sinking fund provision makes a bond issue

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Unformatted text preview: istics of Bond­SF A sinking fund provision is really just a pool of money set aside by a corporation to help repay a bond issue. Typically, bond agreements (called indentures) require a company to make periodic interest payments to bondholders throughout the life of the bond, and then repay the principal amount of the bond at the end of the bond's lifespan. For example, let's say Cory's Tequila Company (CTC) sells a bond issue with a $1,000 face value and a 10­ year life span. The bonds would likely pay interest payments (called coupon payments) to their owners each year. 42 42 Characteristics of Bond In the bond issue's final year, CTC would need to pay the final round of coupon payments (5%) and also repay the entire $1,000 principal amount of each bond outstanding. This could pose a problem because while it may be very easy for CTC to afford relatively small $50 coupon payments each year, repaying the $1,000 might cause some cash flow problems, especially if CTC is in poor financial condition when the bonds come due. After all, the company may be in good shape...
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