A sinking fund is occurring when there is the bond issue; the company can also purchase the bonds from the open market the company may have to face the pros and cons by the sinking funds, for any company. There needs to make the decisions carefully before purchasing of the bond, as a manager, it is necessary to understand the pros and cons that, the sinking fund have.
The pros of sinking funds are, the company can able to make the plans, regarding the purchasing of the assets, however, the company can also address its debts to the stakeholders in advance. The company can know in the market, as the company able to do the long-term planning of its debts, in the market. Moreover, debt type of management could be focused. The interest rate can be lower and the bond prices can be higher. There are also some benefits to the investors; the investors will prefer to buy the bond, which are with the sinking funds so that the risks could be limited.
However, there are also Cons of the sinking funds that the company may face is that there could lose in the expected returns, the investors may also have to face the loss. The company cannot grow if the sinking bond is notable, the company need to manage the funds properly otherwise, there could be depreciation in its potential and losses could be there. However, this could be an attractive investment; risks are involved in the near future.
The company may buy the sinking funds so that future expenses can be carried out, the future expenses can be done with the help of the bond, the bond may save the money of the business, as the company can do the long-term debts planning with the help of sinking funds. The investors and the businesses can get advantages from the sinking funds. However, there are also some disadvantages of the sinking bond, there are many other opportunities from which the benefits could be taken other than sinking funds, as you have mentioned that the liquidity of funds can be reduced, there is various cons example there are losses which the company has to face in the market. Therefore, it is needed to take the decisions properly about the sinking funds.