The meaning of equal debt sinking fund
: the borrower repays the loan interest in installments (service payment of the loan, generally equals the amount of interest due), and at the same time accumulates a sinking fund to repay the loan principal at maturity.
Notation:
L0 original loan principal
i loan annual interest rate
n loan term
I borrower's nominal interest paid at the end of each year, i.e.
I = iL0
j sinking fund interest rate
D borrower's savings to the sinking fund at the end of each year
Borrower's total payments at the end of each year :
Assuming that the borrower's savings to the sinking fund at the end of each year is D, then
Therefore, the borrower's total payment at the end of each year is
Net loan amount at the end of each year :
The cumulative value of sinking funds at the end of year k is
The net loan amount at the end of year k is
When j = i, equal installment method = equal sinking fund method