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What is the purpose of serial repayments and sinking funds?

Question:

What is the purpose of serial repayments and sinking funds?

Long Term Debt:

Long term debt refers to debts or liabilities which do not become due within a year of the balance sheet date. Examples are mortgages, loans, debentures, and they help in measuring a company's leverage.

Answer and Explanation:

Sinking fund. It is a fund set aside to save money used to offset future debts, bills, or damages. Its purpose is to ease financial hardships that a company may experience. It also helps in debt payment since the funds mature at the same time with the debt.

Serial repayment. It is a form of loan repayment where depositing of money takes place at different set dates. The payment of loans doesn't have a specific maturity date but done periodically. Its purpose is to help debt holders to pay off debts easily and comfortably without straining. Payments are made in installments rather than the whole amount at once.


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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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