Examine the pros and cons of a sinking fund from the viewpoint of both a firm and its bondholders.

Complete 3 discussion questions | Business & Finance homework help

A sinking fund’s primary purpose is to provide liquidity for large amounts of debt, such as bonds. The company is less likely to be affected by unexpected market changes or interest rates, which can reduce its financial risk. The predictable nature of these funds can also help bondholders to have additional security in knowing that they will receive their money back.

However, while there may be benefits associated with creating sinking fund from both a firm and its bondholders’ perspective , there some drawbacks should also noted before committing such strategy .. The main reason is the possible negative effect price appreciation stocks could experience in the long term due to the fact that a portion of total assets was specifically earmarked for such purpose.

Furthermore, taking money from reinvestment projects reduces growth opportunities. Shareholders receive lower returns and are completely dependent upon stable dividend distributions. Although all this is important, the main objective of these actions should be to directly address creditors’ needs and ensure they are satisfied.

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