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The sinking fund was first used in Great Britain in the 18th century to reduce national debt. While used by Robert Walpole in 1716 and effectively in the 1720s and early 1730s, it originated in the commercial tax syndicates of the Italian peninsula of the 14th century, where its function was to retire redeemable public debt of those cities.
Sinking funds were also seen commonly in investment in the 19th century in the United States, especially with highly invested markets like railroads. An example would be the Central Pacific Railroad Company, which challenged the constitutionality of mandatory sinking funds for companies in the case In re Sinking Funds Cases in 1878.[3]
In modern finance, a sinking fund is, generally, a method by which an organization sets aside money over time to retire its indebtedness. More specifically, it is a fund into which money can be deposited, so that over time preferred stock, debentures or stocks can be retired. See also "sinking fund provision" under Bond (finance)#Features.
In some US states, Michigan for example, school districts may ask the voters to approve a taxation for the purpose of establishing a sinking fund. The State Treasury Department has strict guidelines for expenditure of fund dollars with the penalty for misuse being an eternal ban on ever seeking the tax levy again.
Sinking funds can also be used to set aside money for purposes of replacing capital equipment as it becomes obsolete, or major maintenance or renewal of elements of a fixed asset, typically a building. Such a fund is also commonly called a reserve fund, however the distinguishing feature of a sinking fund is that the payments into it are calculated to amortize a forecast future expenditure whereas a reserve fund is intended to equalise expenditure in respect of regularly recurring service items to avoid fluctuations in the amount of service charge payable each year.[4]
SECT. 3. That there shall be established in the Treasury of the United States a sinking-fund, which shall be invested by the Secretary of the Treasury in bonds of the United States; and the semi-annual income thereof shall be in like manner from time to time invested, and the same shall accumulate and be disposed of as hereinafter mentioned. And in making such investments the Secretary shall prefer the five per centum bonds of the United States, unless, for good reasons appearing to him, and which he shall report to Congress, he shall at any time deem it advisable to invest in other bonds of the United States. All the bonds belonging to said fund shall, as fast as they shall be obtained, be so stamped as to show that they belong to said fund, and that they are not good in the hands of other holders than the Secretary of the Treasury until they shall have been indorsed by him, and publicly disposed of pursuant to this act.
SECT. 7. That the said sinking-fund so established and accumulated shall, at the maturity of said bonds so respectively issued by the United States, be applied to the payment and satisfaction thereof, according to the interest and proportion of each of said companies in said fund, and of all interest paid by the United States thereon, and not reimbursed, subject to the provisions of the next section. [1]
Some people like to track the savings for big bills in separate accounts, sometimes even a separate sub-accounts. That's great. Whether you call some of these categories "sinking funds" or "short-term savings" doesn't matter in this worksheet. The point is that you have a place called BIG BILLS to remind you to budget for the big important stuff, the stuff that if you don't plan for, could break you.
A district's property tax rate consists of a maintenance and operations (M&O) tax rate and, if applicable, an interest and sinking (I&S) tax rate. The M&O tax rate provides funds for maintenance and operations. The I&S tax rate provides funds for payments on the debt that finances a district's facilities. The calculation of state funding for school districts is tied to tax effort; thus, tax rates provide an essential component in the state's school finance formulas.
Distribute the pages to the class.Follow the Activity procedures:Calculate the future value of an annuity using N, I%, PV, PMT, P/Y, and C/Y values
Calculate the monthly payments to be made to generate a specified future yield using N, I%, PV, FV, P/Y, and C/Y values
Calculate the future value of deposits made quarterly using N, I% (compounded quarterly), PV, PMT, P/Y, and C/Y values
Calculate the amount accumulated in a sinking fund that earns interest compounded monthly
Calculate the monthly payments to be made into a sinking fund to accumulate a specific value in a certain period of time
A sinking fund, also known as an annual sinking fund, is characterized by its name. It is fundamentally designed to sink. A sinking fund compares closely to a reserve fund, although, the primary difference between the two is found in their purpose. Sinking funds have a specific purpose, whereas reserve funds generally do not have particular purposes. A reserve fund is simply a savings mechanism that a company has where it deposits excess money. Reserve funds can serve a multitude of purposes. They can be used to finance business expansions, capital expenditures, asset purchases, emergency expenditures, and a wide range of other expenses.
A sinking fund, on the other hand, has a very specific focus. It is commonly formed to repay debt. This type of fund is a vehicle where a company would deposit sums of money to pay for liabilities like buying back bonds. Two fundamental aspects of a sinking fund are the borrower and the principal. The borrower is the entity that would create the sinking fund to repay money that is borrowed from a lender. The principal refers to the amount that was borrowed. This, along with the interest amount, must be paid back to the lender. A sinking fund is a way to pay down a principal amount that an entity owes before the principal payment date occurs. It is like prepaying the principal amount. In the final year of the loan agreement, the borrower is responsible for repaying the principal and interest of the bond. Sinking funds have a number of characteristics relating to their duration, liability reduction, and management:
With further regard to the management of sinking funds, it is possible to consider it as being actively managed. Despite the mentioned reasons why it does not invest in other assets, the extremely vast scope of the financial market certainly holds beneficial possibilities. Though investments into assets like long-term debt and real estate are certainly not viable considering how illiquid they are, the money market offers a selection of short-term, risk-averse investment options. Assets like government bonds, Treasury bills, and high-yield savings accounts are widely recognized as high-quality investments that are very liquid.
The sinking fund formula is used to determine how much money must be put into the fund in order to meet the financial obligation that the fund was created for. The elements that factor into the formula are combined to create an equation. These elements simply include the principal amount and the interest rate:
John lends $1 million to Steve at a 10 percent interest rate. Ten percent of $1 million equates to $100,000. Adding $1 million and $100,000 results in a total of $1.1 million. This is the amount of money that the sinking fund needs to have by the time that the loan matures.
Tesla looks to finance a $1 billion expansion plan. To raise this money, it sells a $1 billion corporate bond on the open market. This bond has a 10% interest rate and is set to mature in 20 years, which means Tesla will be repaying $1.1 billion in 20 years to buy back the bond. To finance this loan agreement, the company forms a sinking fund in which it will aim to deposit at least $55 million every year. After 20 years, the fund would amount to $1.1 billion when it would then be dissolved to meet Tesla's financial obligation.
A sinking fund is a way to pay down a principal borrowed amount that an entity owes before the principal payment date occurs. A fund like this is typically formed 3-4 years before the maturity date of the loan agreement. Sinking funds are essentially used for prepaying a principal amount. In the final year of a loan agreement, the borrower is responsible for repaying the principal and interest of the bond. The main benefit of using a sinking fund is that it is easier to make many small payments instead of one large payment. The sinking fund formula is used to determine how much money the fund should raise to meet the set financial obligation. The formula relates to calculating the final owed amount, which includes interest.
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.
For all ad valorem taxes, the county excise board sets the levies within the levels authorized by law. For a sinking fund the levy cannot exceed the level needed for servicing the debt. The levies are set in number of mills and certified to the county assessor who computes the property taxes and prepares a tax roll. The tax roll shows the amount of taxes owed by each owner of real and personal property. The tax statements are sent by the county treasurer to the owners of taxable property. The county treasurer also collects the property taxes.
The amount of the annual levy must be sufficient to cover the annual interest payments and the sinking fund accumulations needed to pay off the principal when the bonds mature. Public indebtedness cannot exceed 5 percent of the net assessed valuation of the county. County governments also use revenue from a sinking fund to pay for judgments against the county. Judgments are legal claims against a county which are settled in a court of law. 2ff7e9595c
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