Sinking fund method

1. Acapac Industries established a sinking fund in order to accumulate $10,000 by depositing

equal amounts of money at the end of every 6 months for 2 years. If the fund was earning interest
at 4% compounded semi-annually, calculate the following and construct a sinking fund schedule
to illustrate details of the fund:
(i) Size of the periodic sinking fund deposit.
(ii) Sinking fund balance at the end of the 2nd payment period.
Given:
0.04
FV = $10,000; t = 2 years; = = 2 = 0.02
m = 2 deposits per year X 2 years = 4 semi-annual deposits (for i)
m = 2 deposits per year (for ii)
Required: PMT, FV2
Solution: (i)
(1 + ) 1
= [ ]

(1 + 0.02) 1
10000 = [ ]
0.02

PMT = $2426.24
(ii)
(1 + ) 1
= [ ]

(1 + 0.02) 1
= $2426.24 [ ]
0.02

FV = $4901.00

2. A social networking company wanted to raise $100,000 and issued twenty, $5000 bonds paying
a 10% coupon rate payable semi-annually for five years. It set up a sinking fund to repay the debt
at the end of five years and made deposits at the end of every six months into the fund. The
sinking fund was earning 6.5% compounded semi-annually.
(i) Calculate the periodic cost of the debt.
(ii) Calculate the book value of the debt after three years.
Given:
0.065
FV = $100,000; t = 5 years; =

=
2
= 0.0325
m = 2 deposits per year X 5 years = 10 semi-annual deposits
Required: periodic cost of the debt; and book value of the debt after three years
Solution: (i)
PMT Interest Payment on the Bond = 100,000.00 x 0.05 = $5000.00
(1 + ) 1
= [ ]

(1 + 0.035) 1
100,000 = [ ]
0.035

PMT Sinking fund = $8623.11

The periodic cost of the debt = PMT Interest Payment on the Bond + PMT Sinking fund
= $5000.00 + $8623.11
The periodic cost of the debt = $13,623.11
(ii)
t = 3 years; m = 2 deposits per year x 3 years = 6 semi-annual deposits; i = 0.0325
(1 + ) 1
= [ ]

(1 + 0.035) 1
= $8623.11 [ ]
0.035

FV = $56,129.09
Book Value of the Debt after 3 years = Principal Amount of the Debt - Sinking Fund Balance
at the End of 3 years
= 100,000 - 56,129.09
Book Value of the Debt after 3 years = $43,870.91

3. Suppose you deposit $900 per month into an account that pays 4.8% interest, compounded
monthly. How much money will you have after 9 months?
Given:
0.048 9
= = 0.0004 ; n=9; t=
12 12

Required: FV
Solution:
(1 + ) 1
= [ ]

 (1 + 0.0004) 1
= 900 [ ]
0.0004

FV = $8112.97

4. You want to set up an education account for your child and would like to have $75,000 after
15 years. You find an account that pays 5.6% interest, compounded semiannually, and you
would like to deposit money in the account every six months. How large must each deposit be in
order to reach your goal?
Given:
0.056
FV = 75000; = 2
= 0.028; m = 30

Required: PMT
Solution:
(1 + ) 1
= [ ]

(1 + 0.028) 1
75000 = [ ]
0.028

PMT = $1628.19

5. You have a retirement account with $2000 in it. The account earns 6.2% interest,
compounded monthly, and you deposit $50 every month for the next 20 years. How much will
be in the account at the end of those 20 years?
Given:
PV = 2000; r = 6.2% 0.062; m = 12; t = 20 years
Required: FV (in 20 years)
Solution:

= [1 + ]

0.062 (12)(20)
= 2000[1 + ]
12
FV = $6889.20
(1 + ) 1
20 = [ ]

 0.062
(1 + 12 ) 1 ]
20 = 50 [
0.062
12
= $.

References:
http://coursefiles.intromath.ca/coursefiles/pdf/13_05_ch.pdf
http://www.math.utep.edu/Faculty/cmmundy/Math%201320/Worksheets/Sinking%20Funds%20
&%20Annuities.pdf