Time Value of Money – Six Functions of a Dollar Lesson 5 – Sinking Fund Factor (2024)

FAQs

What is the sinking fund factor? ›

The SFF is the equal periodic payment that must be made at the end of each of n periods at periodic interest rate i, such that the payments compound to $1 at the end of the last period. The SFF is typically used to determine how much must be set aside each period in order to meet a future monetary obligation.

The sinking fund formula is typically calculated as S= (P * i) / (1 - (1 + i)^-n). This formula helps businesses determine the amount of money they need to set aside periodically to cover the total amount due at the maturity of their debt. Why do they call it a sinking fund?

The factor i/[(1+i)n−1] is called the “sinking-fund deposit factor”, and is designated by A/Fi,n . The factor is used to calculate a uniform series of equal end-of-period payments, A, that are equivalent to a future sum F.

A sinking fund is an account containing money set aside to pay off a debt or bond. Sinking funds may help pay off the debt at maturity or assist in buying back bonds on the open market. Callable bonds with sinking funds may be called back early removing future interest payments from the investor.

How do you calculate sinking fund? First, multiply the percentage interest by the principal amount. This will equate to the interest amount, which is then added to the principal amount. This total is the amount of money that needs to be in the sinking fund to meet the set financial obligation.

Money functions as a medium of exchange, allowing individuals to trade goods and services with one another. It also serves as a store of value, allowing people to save wealth over time. Lastly, it functions as a unit of value, enabling people to compare the worth of different items.

What are the six characteristics of money? durability, portability, divisibility, uniformity, limited supply, and acceptability.

Money has three functions: as a store of value, as a unite of account and as a medium of exchange.

A sinking fund is a savings method that helps fund a specific purchase or expense by a certain date. The term “sinking fund” was first used in 18^th century England to refer to funding public debts,¹ but the meaning has changed over the years.

Where is the sinking fund on the balance sheet? ›

A sinking fund is classified as a non-current or long-term asset and is sometimes included in the list of long-term investments or other investments in a balance sheet.

The interest rate for the sinking fund is used to calculate the periodic annuity payment for the sinking fund. For example, if a sinking fund is used to accumulate the face value of a bond, the bond issuer makes a deposit into the sinking fund at the same time they make the bond payment.

A sinking fund can also be set up by private landlords; simply by putting aside a certain amount of the rent received each month. When calculating the amount to be contributed, it is common for landlords to put aside anywhere in the region of five to ten percent of the rental income to allow to be used.

The amounts you save in your sinking funds can be small or large – it's really up to you. Plan to spend $600 on holiday gifts next year? Then you'll add $50 per month to a sinking fund.

A healthy sinking fund eliminates the need for bodies corporate and owner's corporations to borrow funds. A body corporate or owners corporation which carries an ongoing debt is not an attractive proposition for a potential buyer.