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TA B L E O F C O N T E N T
01 Introduction 02 Types of 03 Advantages &
of Sinking Sinking Disadvantages
Funds Funds
04 Identifying
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Formulas & Summary
Calculations
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01 Introduction of Sinking Funds
History
❑ By Sir Robert Walpole in 1716.
❑ The sinking fund was first used in Great Britain during the 18th century.
❑ It was used effectively in the 1720s and early 1730s.
Definition Sir Robert Walpole
❑ Is a specific kind of fund that is established with the intention of paying off debt.
❑ This fund allocates a certain amount of money and uses it only for that purpose.
❑ It can also be presented as a type of bond.
❑ Sinking fund helps attract investors.
❑ Is very similar to a savings account.
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Purpose of Sinking Fund
To avoid,
❑ The need to issue bonds.
❑ Additional borrowings in the future. 4
Practically Example of Sinking fund
My company's annual profit The annual profit of my
is $500. There is no sinking company is $400 . But I
fund in my company. maintain a sinking fund in my
company.
Mr. Premadasa Mr. Rajapaksha
Mr. Wikramasinghe
02 Ty p e s o f S i n k i n g F u n d s
Types Of Sinking Funds
01.Specific Purpose Sinking Fund
02.Callable Bond Sinking Fund
03.Purchase Back Sinking Fund
04.Regular Payment Sinking Fund
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03 Advantages & Disadvantages
Advantages Disadvantages
Helps attract investors Investors are discouraged
Helps maintain financial
Investor loses interest income
stability
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05 Identifying Formulas & Calculations
Formula Of Sinking Funds
1. Sinking Fund Formula
2. Periodic Contribution Formula
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Calculations of Sinking Funds
01. Let's use a sinking fund example with a $5000 monthly periodic contribution. It will be necessary to use
the fund to pay off recently acquired debt (zero-coupon bonds) that were issued for the ongoing
expansion project. Calculate the sinking fund's size assuming a 10-percent annualized rate of interest
and a 12-year repayment period for the debt.
• p= $5000
• r =10%
• t=12
• n=12
Sinking Fund =$5000 * ((1+10%/12) ^ (12*12) – 1)/ (10%/12)
=$1,382,189.38
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02. Bonds worth $8 million, with a 15-year maturity and a 10% coupon rate, were issued by Hayle’s Company. To pay off
the bond, the corporation has set up sinking funds. Semi-annual coupon payments are required, and the market interest
rate is 12 percent.
o Assume that you are the accountant of Hayle’s Company and calculate the company's Periodic Contribution.
• p= $800,000 ($8million*10%)
• r =12%
• t=15
• n=2
Periodic Contribution = $800,000 / (((1 + 12% / 2) ^ (15 * 2) – 1)/ (12% / 2))
=$10119.13
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06 Summary
❑ The sinking fund was first used in Britain in the 18th century and was rightly used by
Sir Robert Walpole.
❑ A sinking fund is a special fund established for the purpose of paying off debts.
❑ Sinking funds can be classified into four main types which are,
1. Specific Purpose Sinking Fund
2. Callable Bond Sinking Fund
3. Purchase Back Sinking Fund
4. Regular Payment Sinking Fund
❑ Insurance is an example of a real personal finance sinking fund.
❑ At the end of all this it is clear that this sinking fund is very important for a
company.
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T H A N K YO U !
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