SINKING FUNDS.—A fund created for gradually extinguishing or paying a debt. Such funds are frequently found in connection with national, municipal, railway, and other debts and funds, and their principle is now very generally adopted by corporations and persons who are under an obli gation to pay off a debt, or provide for a liability or the happening of an onerous contingency at some future date. The mode of creation of a sinking fund is to set aside annually out of income such a sum as accumulated at interest will provide the required capital at the requisite time. It is, how ever, very difficult to accumulate a sinking fund at an adequate interest when the periodical instalments thereof are small in amount. The post-office and trustee savings banks may perhaps in some few small cases offer facilities for the purpose, but as a rule it is to an insurance office that the investor must have recourse. A few examples will illustrate the many useful purposes a sinking fund may be made to serve : To meet the depreciation in the value of leasehold property whether in possession or held on mortgage; to provide sums to cover dilapidations on the expiry of leases ; to provide for repair or replacement of business plant or machinery at the end of a certain number of years ; to provide the difference between the capital invested in debenture bonds and the amount repayable at their maturity; to provide for the re demption of mortgages and of a company's debenture issues.
Assuming that an investor intends to create a sinking fund through the agency of an insurance company, he should before effecting the policy satisfy himself as to the financial stability of the company in relation particularly to an undertaking of this character. He should have especial regard to the fact that, under the Life Assurance Companies Act, 1870, in the case of a company that transacts other business besides that of life assurance, the life assurance fund is not liable for "any contracts of the company for which it would not have been liable had the business of the company been only life assurance." A company with which a sinking fund policy is effected should, therefore, be in a position to protect thepolicy holder by means of such a security as a paid-up share capital in addition to funds formed from the accumulation of premiums.
The rates of premiums, whether single or annual, are based on interest, and should be calculated without addition or loading of any kind ; in other words, the whole of the premiums paid, together with compound interest thereon, should be returned at the end of the specified period. The interest is generally at the rate of 3 per cent. per annum. A sinking fund policy would thus seem to be a thoroughly remunerative investment as well as a very useful one for its particular purpose, especially at a time when consols and the best English railway debenture stocks yield only 24 to 21 per cent. The Sun Life Assurance Society give some practical illustrations of the nature and costs of these policies : (1) Leasehold property.—The purchaser of a leasehold property costing say £5000, unexpired term fifty-four years, may replace his capital by effecting a policy for that amount, payable in fifty-four years, at an annual premium of £37, is. 8d. (2) Debentures and mortgages. —Limited companies find these policies the most suitable and practical means of providing for the redemption of debentures, level annual premiums avoiding the difficulties surrounding the investment of special reserve funds. Debentures for £100,000 maturing in thirty years may be redeemed by an annual premium of £2041, 13s. 4d. An ordinary mortgage debt may be dealt with in the same manner. (3) Machinery and plant.—Manufacturers and others using machinery and plant can effect sinking fundpolicies to cover the cost of their replacement at proper intervals. Take for instance new machinery and plant to the value of £2000, expected to last ten years, a policy can be effected, payable at the end of that period, at an annual premium of £169, 8s. 4d. By this means the expense of replacement would be spread over a series of years and a heavy charge on any one year's working avoided. See AMORTISATION.
See APPENDIX II.