The sinking fund calculator is a tool that helps you find the value you should put aside to achieve your goal at the end of the provided period. If you want to learn more on how to avoid paying lump-sums on your debts or bonds maturities, go to the next section to find the sinking fund definition.
What is a sinking fund?
A sinking fund is a fund which a company may put the money into from now on to make their debt repayments easier. The most common example is a bond sinking fund used by companies to manage their debt.
Bond sinking funds may help you reduce the final amount to pay by making regular payments - and letting interest do the work for them. The company can put aside money, for example, each month, thanks to which they will pay less or even nothing at the maturity of their bonds.
Sinking fund formula
Based on the sinking fund definition from the previous section, you may think of it as finding the value of a regular series payments (the same amount each time) that will give you enough interest to finally reach your goal.
To meet this sinking fund definition and find your contribution, you will need:
- Period - think of the time over which you want to make contributions. For bond sinking funds, it may be the time from today to your bond's maturity;
- Money to accumulate - the amount that you want to collect at the end of the period. It may be the entire principal value of the bond, or just a part of it;
- The annual interest rate that matches your compounding frequency. For example, if your annual interest rate is 6% and interests are compounded monthly, you should use
6%/12 = 0.5%. You needn't worry though, the sinking fund calculator will do that for you, just put your annual interest rate into the tool;
- Rate compound frequency - how often the interest will be paid; and
- You are ready to use this sinking fund calculator! In its
advanced modeyou may find the USSF - Uniform Series Sinking Fund factor. This is the factor by which you multiply your money to accumulate to get the result - your contribution to the sinking fund!
Contribution = Money to accumulate * (interest / ((interest + 1)compound frequency * period - 1))
To understand more about what sinking fund is, let's go through an example.
Bond sinking fund example
Imagine a company issued bonds to get additional money for their investments. Most bonds require you to pay interest until the bond finally matures, upon you have to pay back the principal value. It is very often a lump-sum that has to be paid all together at the end of period. For example, the company Sinking Sink issued 200 bonds, each for $1,000, with a maturity date in 5 years. It means that, after this period, the company will have to pay back
200 * $1,000 = $200,000.
To avoid such a big payment, the Sinking Sink board decided to create a bond sinking fund. They want to have 75% of the $200,000 collected by the sinking fund. They want to pay the same amount each month, and the annual interest rate is 3% compounded monthly. Let's see how much the Sinking Sink company has to contribute to the fund to reach its goal.
Money to accumulate equals
0.75 * $200,000 = $150,000
The monthly interest rate is
3% / 12 = 0.25%
Now we may put all the data into our sinking fund formula:
Contribution = Money to accumulate * [interest / ((interest + 1)compound frequency * period - 1)]
Contribution = $150,000 * (0.0025 / ((0.0025 + 1)12 * 5 - 1))
Contribution = $2,320.30
It means that Sinking Sink has to put aside $2,320.30 each month with these specific financial conditions to reach $150,000 in 5 years.
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