ACTSC 231 slides_for_SF

# Total payment in one period ix y parenleftbig ix j y

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Total payment in one period: iX + Y = parenleftBig iX j · Y · s k 1 j parenrightBig + parenleftBig Y + j · Y · s k 1 j parenrightBig =net interest payment+increment in the SF. C. Weng ([email protected]) – p. 5/

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Sinking fund method (Cont’d) If j = i , then SF method is equivalent to the amortization method: XBox The total payment in each period by SF is equal to the repayment by amortization. XBox Net interest payment at time k by SF is equal to the interest due at time k under amortization method. C. Weng ([email protected]) – p. 6/
Sinking fund method (Cont’d) If j negationslash = i , we can find an interest rate i such that total payments are the same under (i) amortization method with interest rate i , and (ii) SF method with interest rates i & j . XBox SF method with irregular payments RHD Instead of paying X s n j each time, payments can be arbitrary, as long as the balance of the SF account is exactly enough to pay off the loan amount X at maturity. C. Weng ([email protected]) – p. 7/
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