CHAPTER IV

AMORTIZATION AND SINKING FUND

4.1 Amortization of a D&b1
Amocltzatcn is the 11 any OV8r a period of t.me. Equsl pnodic
ooymento or insla,lment royments due a\ tne end of equal mtervals o' tirre are 11aoe tc pay for lne
and ti'e
'oVI'cn a debt IS ':Jy eoual pJ;ms1ts at eqJal tnter;a s. tre debt the prese1t
value crc1na-y annu ly Hence. "'" applj the form Lid of an <:Ydtn<:rt 301Ut!y.
Exa'"Tlple 1 A loan o' P4.0QO ts tc be :omortized by payments at :he e10d of each q.tarnr fa 1 ye<Jr
6 If incerest IS 5% compocnded qJar.er )" i;n:l the P<!IIOd!C and construct the
amortzall01
Given:
so,uttor ..


R P4000(0.0125) _p
69614
1.1 1" 6 j
Amorttzalior Scredule
PayTIEO>nl
Number
,
' 3
4
3
6
t 1 year 6 mo1ths
n =6
:!. ' ,I ,
Interest P;ald

J..
"-H2
3375
2547
1708
'" 176 S1
\i
5%
tz-1
t>'"t>""\l 0 ..... ,


j>Q454 _,.,QF G:CMd fJ.-...o"-1
65L22 .
66239 'ii -"'"'
670.69
679.06
687.55
4,COO Cl3
t::xsmp e Sx serr>iann.Jal

of P450 are <o be made t' pay fc1 a can at 5 1.'2 %

Flnj the value of the loan CJ1struct an a-nort
R = P450
r=5112':,
SoUion
R[
1
i1 0275) 5] P2 458 07
0 ()275
AmortzatJon Schedule
Paymen:
B.<:lance
P2.450 )7
2 OIE.67
1.682 75
1,279 03
66<1 20
Number
1
'
'
5
6
43797
pfj/.6J
08

35 17
23 77
""' .94
m = 2 n-6 i=0.0275
Per:CdiC
Pa'l..ment
P45Ci
'"
"'
'"
'"
. 450
2 700

Repa1o;t
P3S2 4C
392.9
4C3 12
414 83
426.23
4J7.96
2.458.08
3 /. d6hl o' P2 COO llil\1 rntere51 4%

,s b)l osy!T'ent cf
P480 ,vel)l s1x for JS ,-nJ ;;,s nec-essary Fi1C lhe payr;enls and cc.ns:rud an
amort /iltion table t.. so ;,ncJ t1e sr1e of the payn.enl.
G.ver'.
Solukn:
Solve for n_
'
;
'
2.0CIO
02
"-"
I
. PZ 000'0 02' '
'"" ,_ - -' -'
,
n--- --
tc-g:t-1)
r2,0CIO 00
1 5CO.J0
1,111 ?0
65342
'8649
P4J 00
31 20
2222
'3.CII
- 3.73
110 22
1
j
PePud1C
Pnnc pa'

Reca',d
f-'480
P440 00
480
MSBO
48-J
45778
""
466.93
_19(.22
jS6.49
2,11022
2.ooo on
l
i
-
\
l
'
,
l

i
i
' I
'
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4.2 Finding tile Ou1standlng Principal
Tl"e or the ematnlnQ ltaotllltes oe'ore or a'ter any giVen date be
oetsm,ne:J ever wt\l1cut tt"e use cf amoi;za\101 schsdule The outstar.cmg at any date is the
present value of ;oil amou1:s the: are sttll to be pate Tris IB ca l8d melhod nf lie ding the
renai11ng ltabi Ettes
OP _ R '
1
-1-it+i)-tn-L:I]
Whace OP = Ou:stand1ng Pr nctpa
R = Pcnodt:
L
k = nu11oer o' past payr"ents
n- = nu"Ylt>er of payments still to ba road a
Examples
1. An 1s Ia oe arrorttzed bt serniannual pa1mants cf P? 40C fer 8 years. If interes: s
cwnpounUed ser1tanwally 'tntl
(a) outstardhs pnncipa j"st after t'1e 5"' payrenl
(b} tt"e lability aftw 5 years
G:en: R=P2,40CI 1=8 n = 16 r=G%
So:ut1on:

rt6 5:']
Ia) OP5 = P2.400 = P22 206.30
c "'
(b,l
-,_(, 03)-:16-10] I
Qp, O = P2,4CO P13,0C1 28
0.03 J
2 A debt cf f''?.,SOD w1ll be t, ::..ayr1cnts at the end of 3 months a-'ter 3 years and 6
Months_ If 11oney is wcrth 9'fo co11pounded quartcrty, f nd:
(a) :he peyr1ent,
(b) OL.tslanding pr ncpal arter' 1-> years_
G1ven A= P12,500 t = 3 G n=14 r=009 i=C.0225
Sclutton:
A
4.3 Amcrttzatton wtth Irregular Final Paymt>nt
If tlle value the regular payrrent, R. IS ;le:er1llll8d arbitrarily P.S the amount of periOdiC
payr1ents 111 discharging a debt I is almost that t1e f1nal payment w1ll be less R In a
case, f1nd tre prnc JUSt after any particular payme1: us1ng the metlwd does 101 apply
s11ce the nu'Tl::>er of payrPenls is not defin,te
1
I
I
I
'
'
I
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I

'
I

Arclha- fi1d1ng the pri wh G'l mal<.es of past i;; call ad lh<l
'9i'cspecUvc- metho_Q !l':DI,.es tl"c d1ffa'Ence b"'-'''""r the ''<:I.IC cf he debt
ard the value n' payrroonts
Whe-., JP Outstond,rg
LxJmo es
A= Present VJ'L'e of nc l<:>8n
R payment
I il-.tHe;l ""' cd
k = numbor :.ast
1 A o IS :o b<= "'I payme"ls )f P7SO a: t1e e1L ncnln> in ;;s
% necesar; It the 1rtcrcst s w c;. ;e,e:J qL artert1. lird_
G1ver:
:a the ema1r;1q l12t-i il es lh!> RI'O 3 !'"-"'"
-:n: the onrc1pat JUSt altA lh"' :;c"' ""l'''ent
t 1e patment

So!ut1on:
11 V5 '2.
C C15
:11

1-'
(c \
1-(<]15

2. An o:>llgatio; of PL3 OOC ,.,;;1' i1te1est annuJity wrl :>e t) af
Pi,GJJ Jt the of ever
1
year far as :eng as I' In:! t1c "Ina' pa)'mCnt ard when 11 ,s
:IJe.
Given
og
A= "'48,300
P48.JOO x 0 C4
cc'c'c .cocccc__,

log(1 04)
R P7.0JO
1
,
I
'
t
,
'
l
I
1 1
Tl-i,; 3 pJ
1
me:1:s c\ P7.0u( are r. p<;ynert 1t"e cf lhA
9 ,ca_ s sctvc-j fJ
P<.O.COJ- P
7
OCO
x-P12394J
Steps in computing the rnterest the principal in amortization of debt:
1 the octsiJ'c:n;J ,r nc ;ust _.,,. 19
2 CcmpJ:<e the !" t1c rn:erest en tw
3 t1e kuw! -n olt-F ; 'nm +e p'noco-: :o tre Anad
A "'I be ''CPiht,, b; P1 OOC ancl p,-abe <;I 9',:,
;orn["J.I 'Jd tt-w.:lly b 2
:": 1--<c,., 'nuch :s lh: cf lhB
:t: Hew ro nj'"lert ''" I he or-rc of the 1 J'"

n-,:.'-
Sulu. ""
P1 CCS
PR.
0
R -tP
12
. - P1 - P106 c::.. o P693.9:'
2 Tne b ,, IY :c,e p.r.-,1 j'wcis i.; P14 JJO. ,.I CJd'f at the ecu o' m-Jnti'
nclu-:1 'nteest :x:;nroc>odec! i
:JI f-nc the f,r-8
1
o;,y an--J .vlen .t ts Juc
:b: ::/t-latr .. s: raid b::tre t-r;;
c .
R =Pt,(:OJ
P14.JOOxO 01
P' OY
.
o':
ll1ie -
1
eso1c.lha: "G rq;ul:.i.r oi WP. paytrenl atttlc end cf 1
4 conth;: is svl,ec as fotcws
l
I
I
'
t
I
!
I
'
I
I
' -15-
c".Jc-o--P1 oooll-(1.011

Jl)-16 ____.__
' ' 8.C1 '
R total = 15(R) 1 x = P15,000 ?158.24 - P15 158.24
'"'
IDtolal - Rtotal -A= P15 158.24- P14 000- P1 .158 24
10:, th<e of he 1rterest pa.d r1l,sl bP. tc tle O::lffAnon<)P. he.wefm rtr. of -r,.
pa1me1: ard repc.id
It: t1e .npad oJian-:e ;:'.\ of th" pane-d rrust be q.Jal tc the pnncipal rcpatd <'I the

2 11'-"lllcut u;;mg arrcrttzalton s:llej.Jie we cou:d arm"o 3; tOe fJ IO'Ntn;t "S"!; tre

lnterc5: paid or the <lh t,_ -:0,-.k
1
;.,,
tt: The pnn:tpa repaid on the> kth "''' r.rl, '''k R -t,
:CJ ThP. ng pv1ripal afiH k payne>rts. -Cl-', , - f Hk