What is the purpose of a sinking fund in bond issuance?

The purpose of a sinking fund in bond issuance is to facilitate the orderly retirement of a bond issue. A sinking fund is a specific type of savings account that the bond issuer sets up to accumulate funds gradually over time. This helps ensure that funds are available to redeem a portion of the bond issue at maturity or at specified intervals before maturity.

By making regular contributions to the sinking fund, the issuer can manage their debt more effectively, reducing the risk of default and providing assurance to bondholders that their investment will be repaid. This mechanism not only helps to ease the financial burden at maturity but also can stabilize the bond's price in the market, as investors feel more secure knowing that a strategy is in place for repayment.

The other choices do not accurately reflect the primary function of a sinking fund, as they involve aspects that do not directly pertain to the systematic repayment of debt obligations. For example, increasing a bond's interest rate or providing additional collateral does not relate to the management of the bond's maturity, while allowing bondholders to invest in new securities is outside the scope of the sinking fund's main objective.