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Simple English definitions for legal terms
sinking-fund debenture
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A quick definition of sinking-fund debenture:
A sinking-fund debenture is a type of financial instrument that a company can issue to raise funds. It is a type of debenture that requires the company to set aside a portion of its profits each year to pay off the debt. This is known as a sinking fund. The sinking fund is used to buy back the debentures over time, reducing the company's debt burden. This type of debenture is considered less risky for investors because it has a built-in mechanism for paying off the debt.
A more thorough explanation:
Definition: A type of debenture that requires the issuer to set aside money in a sinking fund to repay the debt at maturity. The sinking fund is a separate account that accumulates funds over time to ensure that the issuer has enough money to repay the debenture when it becomes due.
Example: Company A issues $1 million in sinking-fund debentures with a maturity of 10 years. The terms of the debenture require the company to contribute $100,000 per year to a sinking fund. At the end of 10 years, the sinking fund will have accumulated $1 million, which will be used to repay the debenture.
This example illustrates how sinking-fund debentures work. By requiring the issuer to set aside money in a sinking fund, investors are more likely to receive their principal back at maturity. This makes sinking-fund debentures less risky than other types of debt securities.