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

Sinking funds are a form of investment that firms create to finance capital investments or pay off debt over time. Investors can benefit from this as they are assured that their investment will be secured and fully repaid with predetermined payments. Access to these funds allows companies to finance projects, without having to use external financing sources.

Bondholders may face some disadvantages with sinking funds. One of the risks is that payments from the sinking funds might not be enough to cover the rising cost of debt servicing over time. In addition, the lack of liquidity may make it difficult for a firm to meet its obligations. Bondholders would be left in an uncertain situation if they were unable pay their bond.

Bondholders can still benefit from bonds, even though they are riskier than traditional debt instruments such as loans. This is because bondholders get a higher interest rate in exchange for the longer maturity period and more security with repayment terms. How each party will view sinking funds depends on the level of risk they are willing to take and their current financial situation.