sinking fund factor factor

ba736

I'm confused by a concept in Reading 46- sinking fund factor. Why haven't we applied the SSF in other sections, and why didn't we apply it to mortgages in Level I? And why doesnt the cost of debt account for the tax rate, like in other readings?

maryli

The sinking fund can be calculated with atleast two known approaches.... One gives you the mortgage cost after multiplying that rate by 12... and the other way you need to add it to the cost given in the question after multiplying by 12.

using the FV=1 method gives you the mortgage cost as a whole after multiplying by 12 and so I find this way the easiest.

random_walker47

When I calculated the example from mock exam, I got the correct value by sticking to the text book method, i.e.:
(1) using calculator and typing in $1 as FV
(2) using the formula: i / [(1+i)^n - 1]

Hence in the mock exam there might be a mistake.

spreads

FYI.
I also had the same doubts, so I did the following calculation in excel using PMT functions. Hope it helps

number of years N annual interest rate I/Y FV PV type PMT
10 120 8% 0.00667 1 -1 0 $0.00667 $0.0800 annual interest rate
10 120 8% 0.00667 -1 0 0 $0.00547 $0.0656 sinking fund factor
10 120 8% 0.00667 0 -1 0 $0.01213 $0.1456 annual mortgage cost

for a better visibility, you could save the following as a csv file and open it in excel:
number of years,N,annual interest rate,I/Y,FV,PV,type,PMT,,
10,120,8%,0.00667,1,-1,0,$0.00667 ,$0.0800 ,annual interest rate
10,120,8%,0.00667,-1,0,0,$0.00547 ,$0.0656 ,sinking fund factor
10,120,8%,0.00667,0,-1,0,$0.01213 ,$0.1456 ,annual mortgage cost

giorgio10

I'm a little confused by this one too.

The exams seem to be using PV = -1
The textbooks seem to be using FV = -1.

Which one is it?

KungFuPanda

here is everything you need to know about Band of investment method and the SFF, please excuse the formatting (copied from word)

Band of Investment
- Basically just WACC with no taxes, and possibly need to calculate SFF

Mortgage constant = rD = SFF + INT

To solve for SFF:
? N = number of mortgage compounding periods
? i = periodic interest rate (int/m)
? PV = 0
? FV = -1
? Solve for PMT, PMT

profil

Please do yourself a favor and ignore the SFF formula, and just use Payment * 12 / Total Outstanding Loan Amount.

kkn006

>Remember the formula for SFF:

>i / (1-i^n)-1 = SFF

>i = the interest rate


SFF = mortgage constant - interest rate
where mortgage constant is just your regular = PMT (Interest rate/12,years*12,1)

The above mentioned is Excel function. You have similar function in HP12c and TI calculators.

No need to remember SFF formula actually.

ningning1984

Do you guys recall taking sample exam 1 and calculating the sinking fund factor for the band-of-investment method?

I'm reviewing the concept and I have an issue here because in the sample, i recall they used a PV of $1 while the textbook says to use a FV of $1.

Happen to know which is correct?

troymo

1. Taxes is an individual only thing. You get a tax rebate personally - due to having a mortgage - but nothing else. the company that lends money to you does not really care if you get a tax rebate.

2. Sinking fund factor - is nothing but how much you should accumulate today to have 1$ in both principal and interest to pay off against the loan once the loan matures.

3. If you considered your level paying mortgage amount --> Payment * 12 / Total Outstanding Loan Amount = SFF.

also equal to
Debt Rate on Mortgage (annual) + how much you should accumulate to have 1$ at the end of the loan.

As to why they did not get this concept in Level I - they did not want to overwhelm us... though they are managing to do that quite well... (at least in my case).

CP