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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 Spring '10
 Jenny
 Math, Debt, Interest, Sinking Fund, Interestonly loan

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