A bond issuer creates a sink schedule for bonds to calculate the amount of money it needs to set aside at regular intervals to pay off or retire the bonds when or before they reach their maturity date. Typically, bond issuers set aside these funds in interest-bearing accounts and the interest earned is taken into consideration when calculating a sink schedule.
1. Calculate the total value of bonds outstanding. To complete this calculation, multiply the face value of the bonds by the number of bonds outstanding. For example, if there are 10 bonds outstanding with a face value of $1,000 each, the total value outstanding is $10,000.
2. Divide the total value outstanding by the years to maturity. This calculation gives you the amount of money you have to deposit into the sink fund at regular intervals.
3. Record the first-year deposit. The first-year deposit is equal to the amount of the regular deposits. For example, say a company issues bonds that have a total value of $10,000 with five years to maturity. The company plans to make annual deposits to the sink fund. Each deposit must equal $2,000 ($10,000 / 5 years = $2,000).
4. Calculate the interest earned. Multiply the first year's deposit by the interest rate. Using the example in Step 3, say the interest rate on the sink fund is 5 percent, compounded annually. The interest earned on the $2,000 deposit is $2,000 x .05 = $100.
5. Calculate the second deposit amount. The deposits in the following years on the sink schedule must equal the amount the bond issuer must deposit yearly. Using the example in Step 3 the issuer deposits $2,000 the first year, which earned $100 in interest. This means the following year, the bond issuer must deposit $1,900. The total amount deposited for year two is $1,900 + $100 = $2,000.
6. Repeat Steps 4 and 5 until the bond's maturity date. To complete the sink fund schedule, you have to calculate the interest earned from the deposits each year. Using the example in Step 4, to calculate the third-year deposit, you add the first two year's deposits totaling $4,000. Multiply that amount by the interest rate, in this case, 5 percent. This equals $200. So, in year three, the deposit amount is $1,800 plus the interest earned of $200, making the total deposit amount $2,000.
Items you will need
- Number of bonds outstanding
- Bond maturity date
- Bond's face value
- Bank account interest rate