A sinking fund is an account set-up by a municipality to redeem or purchase its bonds prior to maturity. By having a sinking fund, a municipality can reduce its debt load over time, avoiding the need to finance a large lump sum when the bond reaches maturity. Typically, a municipality is required to put a certain amount in the sinking fund every year, as described by the bond offering statement. Depending on how the sinking fund is set-up, it may be used to purchase bonds on the open market, or by exercising the bond’s call feature. (You can learn more about callable bonds here.)
There is good side and bad side to a sinking fund for bondholders:
When investigating sinking funds, you may also hear about super sinking funds. A super-sinker is specifically related to single family mortgage revenue bonds. Funds gathered through the prepayment of mortgages go into the super sinker. Otherwise, a super-sinker operates likes a normal sinking fund.