Legal Definitions - sinking-fund debenture

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.