15.5 Sinking Funds[1]

# 15.5 Sinking Funds[1] - 15.5 Sinking Funds Sinking Fund...

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1 15.5 Sinking Funds Sinking Fund Method of Debt Extinction used when interest only is to be paid periodically and the principal is returned in 1 lump sum at the end of the term of the loan periodic interest = principal × periodic loan rate SINKING FUND is used to accumulate principal only Amount of the Sinking Fund = Principal (loan) SF deposit made at the same time as the interest payment is due to calculate the SF deposit PMT use FV and SF rate FV = loan (PV = 0)

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2 Interest Rates Periodic loan rate used only to calculate the periodic interest Interest Payment = Principal × periodic loan rate SF rate used to calculate the SF deposit PMT = SF Deposit FV = loan (SF amount) I/Y = SF rate (PV = 0) On a \$1,000, 1 year loan at j 4 = 12%, interest is to be paid quarterly. A sinking fund is established in order to accumulate the principal. The sinking fund earns j 4 = 5%. a) Find the periodic interest payment. b) Find the periodic sinking fund deposit.
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15.5 Sinking Funds[1] - 15.5 Sinking Funds Sinking Fund...

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