Is sinking fund provision in the interest of shareholders or is it something which is not in favor of shareholder?
I think you mean bondholders. Sinking funds lessen default risk but increase reinvestment risk. You can even lose money if the sinking fund purchase some bonds back at a lower price than what you paid.
So, if a bond has a sinking fund provision then it will provide a higher interst rate?
A sinking fund provision benefits the bond issuer so, like a callable bond, the issuer would have to offer a higher rate compared to a similar straight bond.
An accelerated sinking fund provision benefits the issuer because they can pay off as much as they want as early as they want. However, a normal sinking fund provision benefits the bondholder because it decreases default risk (though increasing re-investment risk). Right?
So, you mean that the sinking fund provision will benefit the bondholder and not the issuer?
Correct, the bond with a sinking fund provision is less risky, thus beneficial to the bondholder. However, it is important to note the added re-investment risk associated with this. From investopedia: From the investor’s point of view, a sinking fund adds safety to a corporate bond issue: with it, the issuing company is less likely to default on the repayment of the remaining principal upon maturity since the amount of the final repayment is substantially less. This added safety affects the interest rate at which the company is able to offer bonds in the marketplace. An ACCELERATED sinking fund provision is an embedded option granted to the issuer, and thus benefits the issuer. They can pay off more than the required amount earlier, increasing re-investment risk to the bondholder by an even greater amount.