When the allotment plan is used to amortize bonds, the funds are first paid to the trustee by the corpora tion under the terms of the trust deed. The trustee then draws by number the bonds to be retired and advertises them in the newspapers with the redemption price. As these bonds come in, they are either canceled, or are kept alive in the sinking fund drawing interest, stamped "Purchased and held for the sinking fund." The same disposition is made if the bonds are pur chased in the open market, but in such case the fluc tuation of bond prices will prevent the fund payments from working out with exact mathematical accuracy. If the trustee has the option to pursue the most ad vantageous course, he will buy in the open market, unless the market price is higher than the stated re demption price, in which case he will purchase by al lotment.
There is no necessity for keeping the bonds alive and drawing interest in the fund after purchase. This plan was evolved to even up the burden upon the corporation by making constant both the interest and the burden of the debt. The same thing may be accomplished, and with less risk and labor, by cancel ing the bonds immediately as paid, and simply arrang ing the payments by scientific sinking-fund methods, so that the annual amount paid on interest and prin cipal will total a constant sum sufficient to liquidate both in the number of years desired. It has already
been made clear why the sinking fund should not be held in cash or invested outside. The plan here in dicated, of amortizing by annual purchase, to the best advantage in the open market or by allotment, bonds to be canceled as bought and payments made con stant by scientific schedule, is in most cases, the best plan to follow when the amortization is necessary.
One thing should be clearly understood, however. No fund is in any sense a sinking fund which is re invested in the property or business of the debtor com pany. Such a policy of reinvestment may be prefer able in many cases to the maintenance of a sinking fund, as provided, for instance, in the trust deed of the San Diego Consolidated Gas and Electric Com pany first-mortgage bonds. A sinking fund consists of funds which have been set aside for the purpose of paying a debt. Funds reinvested in the business have not been set aside, nor are they available for the pay ment of debt, nor may they be called sinking funds.