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TWO MAJOR REASONS GENERALLY are cited for including sinking fund provisions in corporate bond issues. First, they reduce default risk by providing for an orderly debt service pattern that systematically reduces the principal outstanding. Second, purchases for the sinking fund help provide a liquid market for the bond issue (see [2]). This reasoning suggests that the yield required by investors-and, therefore, the issuer's interest costs-will be lower for debt obligations that carry sinking fund requirements than for those that do not. In their analysis of sinking funds and investor realized yields, Jen and Wert [4] demonstrate that lower yields on bond issues with sinking funds can be explained by the term structure of interest rates. They also point out that this yield effect results in a reduced interest rate to the issuer.The apparent benefits of sinking fund provisions notwithstanding, the incidence of such bonds varies according to the type of issuer. In particular, public utility and finance company obligations often are issued without sinking fund provisions, whereas industrials almost invariably include sinking fund requirements (see [2]). The type, amount, and timing of sinking fund requirements also varies.' This paper examines the effect of sinking funds on the interest cost for a given bond issue and on an issuing firm's total costs in maintaining a given level of debt financing. I. Sinking Fund Provisions and Interest RatesIn this section we examine reoffering yields on new bond issues, comparing sinking fund bonds to bonds without sinking funds. For the purpose of this study, a sinking fund bond is defined as one that provides for the retirement of between 75 per cent and 100 per cent of the initial principal amount of the issue before maturity, whereas a nonsinking fund issue is defined as one where the sinking fund (if any) retires less than 25 per cent of the initial principal before maturity. Methodology. Industrial and public utility new issues during a seventeen-year period, from 1960 through 1976, were examined. Sinking fund and nonsinking * University of Wyoming and University of Tulsa, respectively. We are grateful to Steve K. Burke for his assistance, and to Stanley A. Martin, Jr., and Richard A. Robrock for their comments.' There are many different types of sinking funds: the size of the sinking fund can be a percentage of a given issue or of total debt outstanding; it can be fixed or variable; and it can be stated in either a dollar or a percentage basis. In some cases, sinking fund contributions can even be used to purchase additional fixed assets rather than to reduce debt. The amount of the issue that must be repaid before maturity may range from a nominal sum to 100 per cent; and the payments may commence at the end of the first year or may be deferred for 5 to 10 years from the date of issue. This latter practice is common during periods of high interest rates. (See [3] pp. 218-222 for additional details concerning sinking fund provisions.) 887