Sinking Funds

Sinking Fund definition and usage

A fund that a big private company or a government organization accumulates aside with periodic deposits in order to collect a specific large sum of money at the end of a specific time, which is started much in advance. The fund is used as a saving to buy back the organization's bonds off the market that was issued to borrow some money for big capital purchases or to repay loans. The fund is usually administrated by a trustee; the third party who is given the legal authority to manage money on behalf of the organization.

Sinking funds are interest-bearing funds. Usually, the deposits into the sinking funds are made at the same time as the interest payments on the debt are being paid to the lender. Ð''Periodic expense' or the cost of the debt is the interest payment and the sinking fund period added up together. The sinking fund remains under the control of the organization during the period. When the loan matures the borrower returns the whole principal as a lump sum payment by transferring the accumulated value of the sinking fund to the lender

Sinking Fund Schedule

For any sinking fund, the amount needed in the fund, the time the amount is needed for, and the interest rate earned on the fund are all known factors that then create an annuity problem. To solve the annuity problem the size of the payments and the sinking-fund deposits need to be determined.

The growth of the sinking fund can be shown in a schedule showing the number of the interval payments, the periodic payment into the funds, the interest that the fund earns, the resulting increase in the fund, and the accumulated amount at the end of the period.