ACTSC 231 slides_for_SF

ACTSC 231 slides_for_SF - 5.2 (Sinking Fund Method)...

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Unformatted text preview: 5.2 (Sinking Fund Method) ACTSC231 Mathematics of Finance Department of Statistics and Actuarial Science University of Waterloo Fall 2010 Instructor: Chengguo Weng C. Weng (c2weng@uwaterloo.ca) p. 1/ 7 Sinking fund method Instead of making payments that include both interest and principal, make only interest payments, but separately build up a fund that will grow to the loan amount at maturity. XBox This fund is called a sinking fund XBox Sinking fund may earn an interest rate different from that charged for the loan XBox The lender might force the borrower to establish a sinking fund C. Weng (c2weng@uwaterloo.ca) p. 2/ 7 Sinking fund method (Contd) Notation: XBox X original loan amount XBox i interest rate on the loan (per period) XBox j interest rate earned in the sinking fund account XBox n number of the periods of the loan Interest payment is iX If the deposits into the sinking fund (called sinking fund payments) are level, say Y each period, it should be determined by:...
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ACTSC 231 slides_for_SF - 5.2 (Sinking Fund Method)...

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