AMORTIZATION AND

SINKING FUND

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Learning Objectives

• Define terms and concepts of amortization

and sinking fund
• Set up an amortization schedule
• Set up a sinking fund schedule
Definition of Terms
Amortization
• the gradual extinguishment of any amount
over a period of time
• the extinction of debt, principal, and
interest by means of a sequence of equal
periodic payments or installment payments
due at the end of equal intervals of time
Definition of Terms
Amortization Schedule
• a table which shows how much is applied
to reduce the principal and how much
portion is paid for interest to show the
outstanding principal or remaining liabilities
after each payment period
Example 1
Jose purchased an expensive watch for
P45,000. Using his credit card he promised to
pay the said item in 8 monthly installments.
His first payment will be made one month
after the date of purchase. If money is worth
12% compounded monthly, construct an
amortization table.
Example 1
Step 1: Solve for R

12%
𝐴×𝑖 (45 000)
𝑅𝑎 = = 12
[1 − 1 + 𝑖 −𝑛 ] 12% −8
1 − 1 + 12

𝑹𝒂 = 𝟓 𝟖𝟖𝟏. 𝟎𝟔
Example 1
Step 2: Construct a table
Periodic Interest per Payment to Outstanding
Period
Payment Period the Principal Balance (OB)
0 P 45,000
1 P 5, 881.06 P 450 P 5,431.06 P 39, 568.94
2 P 5, 881.06 P 395.69 P 5, 485.37 P 34, 083.57

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑒𝑟 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑂𝐵 × 𝑖

𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑡𝑜 𝑡ℎ𝑒 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 = 𝑅 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑒𝑟 𝑃𝑒𝑟𝑖𝑜𝑑
𝑂𝐵 = 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑂𝐵 − 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑡𝑜 𝑡ℎ𝑒 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
 Periodic Interest per Payment to Outstanding
Period
Payment Period the Principal Balance (OB)
0 P 45,000
1 P 5, 881.06 P 450 P 5, 431.06 P 39, 568.94
2 P 5, 881.06 P 395.69 P 5, 485.37 P 34, 083.57
3 P 5, 881.06 P 340.84 P 5, 540.22 P 28, 543.35
4 P 5, 881.06 P 285.43 P 5, 595.63 P 22, 947.72
5 P 5, 881.06 P 229.48 P 5, 651.58 P 17, 296.14
6 P 5, 881.06 P 172.96 P 5, 708.10 P 11, 588.04
7 P 5, 881.06 P 115.88 P5, 765.18 P5, 822.86
8 PP 5, 881.09
881.06 P 58.23 P 5, 822.86 0.00
0.03
Total 048.51
P 47, 048.48 P 2, 048.51 P 45, 000
Example 2
A loan of P40,000 is to be amortized by
equal payments at the end of each quarter
for 18 months. If interest is 10% compounded
quarterly, find the periodic payment and
construct an amortization schedule.
Definition of Terms
Sinking Fund
• is a savings fund, productively invested into
which equal periodic payments are made
• It is designed to accumulate a specific sum
of money within a specified date
• A sinking fund is created with a definite
end in view, such as big expenses in the
future
Definition of Terms
Sinking Fund Schedule
• a table showing the gradual growth of
money deposited to create a fund
• It also shows how much interest is earned
every period, and the amount before and
after periodic deposits.
Sinking Fund Sample Table
Amount at Interest per Regular Amount at the
Period
the Beginning Period Deposit End
1 50, 000 50, 000
2 50, 000 625 50, 000 100, 625

Amount at the beginning = Previous amount at the end

Interest per period = Amt at the beginning × i
Amount at the end = Amt at the beginning + Interest per period + R
Example 3
The sum of P 35,000 will be needed at the end
of 3 years. If money can be invested at 5%,
m=2,

a. find the semi-annual deposit

b. construct a sinking fund schedule

Example 3
Step 1: Solve for R

5%
𝑆×𝑖 (35 000)
2
𝑅𝑠 = 𝑛
=
[ 1 + 𝑖 − 1] 5% 6
1+ 2 −1

𝑹𝒔 = 𝟓 𝟒𝟕𝟗. 𝟐𝟓
 Amount at Interest per Regular Amount at
Period
the beginning Period Deposit the end
1 P 5,479.25 P 5,479.25
2 P 5, 479.25 P 136.98 P 5,479.25 P 11,095.48
3 P 11,095.48 P 277.39 P 5,479.25 P 16,852.12
4 P 16,852.12 P 421.30 P 5,479.25 P 22,752.67
5 P 22,752.67 P 568.82 P 5,479.25 P 28,800.74
6 P 28,800.74 P 720.02 P 5,479.25 P 35,000.01

Total P 2,124.51 P 32,875.50 P 35,000.01

Example 4
In order to have P100,000 for the replacement
of a machine at the end of 4 years, the RDC
company will make semiannual deposits in a
fund that earns interest at 16% compounded
semiannually. Find the semiannual deposit and
construct the sinking fund schedule.
Seatwork:
1. A loan of P50,000 is to be amortized by equal
payments at the end of each month for 6 months. If
interest is 24% compounded monthly, find the
periodic payment and construct an amortization
schedule.
2. A fund is to be created by depositing P5,500 at the
end of each three months for 3 years in a bank that
pays 9%, m=4. Find the amount in the fund at the
end of the term by preparing a complete sinking
fund table.