Sinking Fund

The Sinking Fund calculation is used to calculate the periodic payments that will accumulate by a specific future date to a specified future value.

For the borrower to pay the interest on the loan as it falls due and to create a sinking fund to accumulate the principal at the end of the term of the loan is a common method of paying off a long-term loan.

To find the periodic cost of the debt, add the periodic interest payments (which can be at another rate) and the periodic payments of the sinking fund.

To see the amortization schedule, select the Show Details command in the Calculation menu.

To toggle between date and year/period view, click the header of the first details column.

To change the start date, select the Start Date command in the Edit menu to open the Date Options dialog.

Input

• nominal annual rate

• compounding frequency

• payment frequency

• number of years or payments

• future value

Results

• periodic payment

• present value

• total paid

• total interest

Examples

•

A city borrows $500,000 and agrees to pay interest semiannually at 10 % compounded semiannually.
What semiannual deposits must be made into a sinking fund earning interest at 8 % compounded semiannually to be able to repay the debt after 15 years?

Input	Nominal annual rate:	8 %
	Interest is compounded:	semiannually
	Payments are made:	semiannually
	Number of years:	15
	Future value:	500,000

Result	Periodic payment:	8,915.05

Answer: $8,915.05

•

What is the periodic semiannual cost of the above debt?

The sinking fund method only calculates the payments needed to create the needed principal. To obtain the total periodic cost of the debt the interest payments have to be added to the sinking fund payments.

The semiannual interest on the outstanding debt can be calculated by switching to the Balloon Payment Loan calculation and by entering 500,000 as the balloon payment.

Calculation	Balloon Payment Loan

Input	Nominal annual rate:	10 %
	Interest is compounded:	semiannually
	Payments are made:	semiannually
	Number of payments:	36
	Present value:	500,000
	Balloon payment:	500,000

Result	Periodic payment:	25,000

Answer: $25,000 + $8,915.05 = $33,915.05.

Related topics