Department of Education

SCHOOLS DIVISION OF CITY OF MEYCAUAYAN

Pag-asa St., Malhacan, City of Meycauayan, Bulacan

Senior High School

Activity Sheet 12
in
Business Finance
Quarter 1 – Week 7:
Compute Loan Amortization using
Mathematical Concepts and the
Present Value Tables
(ABM_BF12-IIIg-h-20)
 COMPUTE LOAN AMORTIZATION USING MATHEMATICAL
CONCEPTS AND THE PRESENT VALUE TABLES

LET US KNOW

Read and analyze the article below.

ICTSI to raise $450-M via bonds

Reuters
Posted at 08/19/2015 10:05 AM

MANILA - Philippines port operator International Container Terminal Services Inc.

(ICTSI) said on Wednesday it is raising $450 million through a bond issue.
In a disclosure to the local stock exchange, ICTSI said its board of directors
approved on Tuesday night the offering of new senior perpetual capital securities through
subsidiary Royal Capital BV.
The corporate bonds would yield 5.5 percent per annum and would be guaranteed
by ICTSI.
Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard
Chartered Bank were the joint lead managers and bookrunners.
ICTSI, owned by the Philippines' third richest man, Enrique Razon, is into 30
terminal concessions and port development projects in 20 countries.

LET US REVIEW

Recall the definition and the formula of present value, future value, and the
importance of the time value of money from the previous lesson. Explain each briefly.

LET US STUDY

Definition:

A loan is money lent at an interest rate for a certain period of time. Loans are
normally secured from different financial institutions, the most common of which, are
banks.

A bond is also a form of loan but can be traded through Philippine Dealing and
Exchange (PDEX) System.

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Contents of a loan agreement:
 Amount of principal
 Maturity date and provision for repayment
 Term of the loan (lump sum, monthly, etc.)
 Grace period, if applicable
 Interest rates
 Loan/bond covenants (i.e. required ratios to be maintained)
 Penalties for default
 Collateral documents, if applicable

Relationship of time value of money in loan/bond pricing

Present Value
 To get the present value of a bond maturing a year from now, let us illustrate what
we have learned in the previous module regarding present value. The discussion
follows the viewpoint of the lender. Pricing for the loan/bond, will, nevertheless, be
the same. Let’s say that you are willing to invest a sum of money that will yield
₱100,000 at the end of year 1, what amount should you invest today? If the
investment earns 10%, then the amount to be invested or the present value should
1
be equal to ₱100,000𝑥 (1.101 ) = ₱90,909.09.
 If this amount will be received in 2 years, then the present value is equal to
1
₱100,000𝑥 (1.102 ) = ₱82,644.63. We may also use the present value table.

Present Value of interest payments (annuities)

 In addition to receiving the face value at maturity, the investor/lender also receives
periodic interest payments over the life of the bond. These periodic payments, as
mentioned in the previous module, are called annuities. To illustrate, assume that
you will receive ₱10,000 annually for 3 years and the interest rate is 10%.
 From the table (or by using the formula provided in the earlier module), we get that
the present value of annuity factor for 3 periods using 10% interest is 2.4869.
Multiplying this factor by ₱10,000 provides a present value of interest payments of
₱24,868.6.

Present Value of a bond

 To calculate the present value or the price of a bond, we need to combine both the
present values of the face value and the annuity payments. In our previous example,
suppose that a bond with face value of ₱100,000 pays interest of 10% annually and
matures in 3 years. What is the price of the bond?
1. Find the present value of the face value of the bond. That is equal to
1
₱100,000𝑥 (1.103 ) = ₱75,131.40.
2. Compute for the present value of annuity payments of ₱10,000 annual
interest (₱100,000 𝑥 .1). This was computed earlier in our example, ₱24,868.6.
3. Therefore, the price of the bond is:
₱100,000 Face Value at 10% for 3 years ₱75,131.40
₱10,000 interest for 3 years ₱24,868.60
Price of the Bond ₱100,000.00

Take note that interest payments may be made semi-annually, or even monthly. In
this case, we need to adjust the interest rates and time periods accordingly.

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Differentiate discount from premium bond pricing.
Bonds issued at a discount
 When bonds are issued below the face or par value, they are said to be issued at a
discount. A discount occurs when the required rate of return is greater than the
nominal rate of return. For example, let’s say we have a ₱100,000 bond with a
stated rate of 10% and effective rate (required rate of return) of 12%, that pays
interest semi-annually and has a maturity of 3 years. At what price should the bond
be issued?
1. Compute for interest payment per semi-annual period which is equal to
₱100,000 𝑥 10% 𝑥 6/12 = ₱5,000. The total period is 6 (3 years x 2) and the
discount rate to be used is 6% (12%/2).
2. The price of the bonds is as follows:
₱100,000 Face Value at 6% for 6 periods ₱70,496.05
₱5,000 interest for 6 periods ₱24,568.62
Price of the Bond ₱95,082.67

Bonds issued at a premium

 When bonds are issued above par, they are said to be issued at a premium. It occurs
when the required rate (effective rate) is below the stated or nominal rate. Let us
recall our previous example but use 8% effective rate instead of 12%. It will result in
the following bond price:
₱100,000 Face Value at 4% for 6 periods ₱79,031.45
₱5,000 interest for 6 periods ₱26,210.68
Price of the Bond ₱105,242.13

Effective interest amortization

 The effective interest method distinguishes two types of interest rate, the nominal
rate or the stated rate and effective rate or the market rate. When the bond is sold at
a discount, the effective rate is higher than the nominal rate. On the other hand,
when the bond is sold at a premium, the effective rate is lower than the nominal
rate. Using this method, the amortization of bond discount or premium results in
periodic interest expense equal to a constant percentage of the carrying amount of
the bonds.
 The following steps are required under the effective interest method.
1. Calculate the bond interest expense by multiplying the carrying amount of the
bonds at the beginning of the interest period by the effective interest rate.
2. Calculate the bond interest paid (or accrued) by multiplying the face value of
the bonds by the contractual interest rate.
3. Calculate the amortization amount by determining the difference of (1) and (2).

Amortization of bonds issued at a discount

Let us use the previous example of a bond issued at a discount.

Period: 6 semi-annual periods (3 years)

Effective interest: 12%
Stated rate: 10%
Face Value: ₱100,000
Issue Price: ₱95,082.68

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 Period Interest to be Interest Amortization of Carrying
paid = ₱100,000 Expense = Discount = Int Balance
x 5% carrying exp. - Int paid
amount x 6%
₱95,082.62
1 ₱5,000 ₱5,704.96 ₱704.96 ₱95,787.64
2 ₱5,000 ₱5,747.26 ₱747.26 ₱96,534.90
3 ₱5,000 ₱5,792.09 ₱792.09 ₱97,326.99
4 ₱5,000 ₱5,839.62 ₱839.62 ₱98,166.61
5 ₱5,000 ₱5,890.00 ₱890.00 ₱99,056.61
6 ₱5,000 ₱5,943.40 ₱943.40 ₱100,000.00

 Amortization of the discount or premium brings the carrying value/balance to equal

the face value of the bond upon maturity.
 Bond issue costs (direct loan expenses) are either added to the carrying value of the
bond/loan in case of a premium or subtracted from the carrying value of the bond/loan
in case of a discount.
Line Amortization
This method is not allowed in our country’s accounting standards but is allowed in
other countries. The straight-line method provides for an equal amortization of bond
premium of discount. The procedure is simply to divide the amount of the bond premium of
bond discount by the life of the bonds to arrive at the periodic amortization.

LET US PRACTICE

Period: 6 semi-annual periods (3 years)

Effective interest: 8%
Stated rate: 10%
Face Value: 100,000
Issue Price: 105,242.14

Period Interest to be Interest Amortization of Carrying

paid = ₱100,000 Expense = Discount = Int Balance
x 5% carrying exp. - Int paid
amount x 4%
₱105,242.14
1 ₱5,000
2
3
4
5
6 ₱100,000.00

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 LET US REMEMBER

Answer the following. Write your answer on a separate sheet of paper.

1. How is the regular payment in an amortization schedule determined?
2. How is interest computed in amortization schedule?

LET US APPRECIATE

Have the learners visit a bank or any other financial institution and get a sample
quotation for a certain type of loans (Auto-loan, Housing Loan, Working Capital Loan, etc.)
to be assigned to a group. It is best to divide the class in groups of 5 members. Learners
may also utilize amortization schedules of those who are in the business of selling
apartments/condominiums. Have them discuss the specifics of the loan in class and have
them validate the accuracy of the amortization schedules provided to them by showing their
own solutions.

LET US PRACTICE MORE

Solve the following. Write your answer on a separate sheet of paper.

1. Ms. Rodriguez invested in a PHP2,000 bond with a coupon rate and effective rate of
5%. How much is the issue price?
2. You have a one-year PHP1,000 bond with a coupon rate of 5% and was offered at an
effective rate of 6%. How much is the issue price?
3. Mr. Garcia invested in a P1,000 bond for one year with a coupon rate of 7% and was
offered at an effective rate of 5%. How much should he pay upfront? (Issue price)
4. On January 1, 2015, Mac Inc. issued 3,000,000 bonds with a coupon rate of 8%
maturing in 4 years. The interest is paid annually, and the market interest rate at
the date of issue was 11%. What is the issue price of the bond? Prepare the 4-year
amortization schedule for the bond.
5. On January 1, 2014, Sonic Co. issued 4,000,000 12% bonds maturing in 5 years.
The bonds pay interest semi-annually. The market rate of interest as of the date of
issuance is 10%. What is the issue price of the bond? Prepare the 5-year
amortization schedule for the bond.

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 EVALUATION

Solve. Write your answer on a separate sheet of paper.

1. Mrs. Lorenzo invested in a ₱3,000 bond for one year with a coupon rate of 6% and
was offered at an effective rate of 3%. How much should he pay upfront? (Issue
price)
2. Dr. Santos invested in a ₱6,000 bond with a coupon rate and effective rate of 4%.
How much is the issue price?
3. You have a two-year ₱2,000 bond with a coupon rate of 10% and was offered at an
effective rate of 8%. How much is the issue price?
4. On January 1, 2017, May Co. issued 3,000,000 10% bonds maturing in 5 years. The
bonds pay interest semi-annually. The market rate of interest as of the date of
issuance is 8%. What is the issue price of the bond? Prepare the 5-year amortization
schedule for the bond.
5. On January 1, 2019, Trim Inc. issued 5,000,000 bonds with a coupon rate of 8%
maturing in 4 years. The interest is paid annually, and the market interest rate at
the date of issue was 11%. What is the issue price of the bond? Prepare the 3-year
amortization schedule for the bond.

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 All Rights Reserved
2020

ACKNOWLEDGEMENT

CAROLINA S. VIOLETA, EdD

Schools Division Superintendent

CECILIA E. VALDERAMA, PhD

Asst. Schools Division Superintendent

DOMINADOR M. CABRERA, PhD

Chief, Curriculum Implementation Division

EDWARD C. JIMENEZ, PhD

Education Program Supervisor- LR Manager

JOCELYN A. MANALAYSAY, PhD

Education Program Supervisor- Mathematics

REALYN B. TANABE
Developer-ASHCOM