AMORTIZATION SCHEDULE

Suppose a loan of $2,500 is made to an individual at 6% interest compounded quarterly. The loan is
repaid in 6 quarterly payments.
SOLUTION:
i∙ PV
PMT =
1−¿ ¿
0.06
For this problem the interest rate period is i= . The present value is PV =2500 and the
4
number of periods is n=6. Using these values gives
0.06
∙2500
4
PMT =
1−¿ ¿
Then, find the total payments and the total amount of interest paid based on the calculated monthly
payments.
The total payment is 438.813 ( 6 )=2632.86
The total amount of interest is 2632.86−2500=132.86 .

Payment Amount of Interest in Amount in Outstanding

Number Payment Payment Payment Balance at the
Applied to End of the
Balance Period
0 2500
1 438.81 37.50 401.31 2098.69

0.06 438.813−37.5 2500−401.31

∙ 2500
4

Payment Amount of Interest in Amount in Outstanding

Number Payment Payment Payment Balance at the
Applied to End of the
Balance Period
0 2500
1 438.81 37.50 401.31 2098.69
2 438.81 31.48 407.33 1691.36
3 438.81 25.37 413.44 1277.92
4 438.81 19.17 419.64 850.28
5 438.81 12.87 425.94 432.34
6 438.83 6.49 432.34 0
Since the payments had been rounded to the nearest penny(rounded down), the final
payment is slightly higher than the previous payments. Adding all of the payments we get a
total of $2632.88. Adding the interest amounts gives total interest of $132.88.

BONDS
Example #1: If the current rate of interest is 10% and interest is compounded semiannually, what is
the present value of receiving $10,000 at the end of 7 years?

Solution #1:
There are 14 interest compounding periods (7 years x 2)
The interest rate per compounding period is 5% (10% / 2)
Rate from the PV of $1 Table = .50507
Present value = 10,000 x .50507 = $5,050.70

Example #2:
If the current interest rate is 12% and interest is compounded semiannually, what is the present
value of receiving $5,000 each year for 10 years?

Solution #2:
There are 20 interest compounding periods (10 years x 2)
The interest rate per compounding period is 6% (12% / 2)
Rate from the PV of $1 Table = 11.46992
Present value = 5,000 x 11.46992 = $57,349.60

Example #3:
Beta Company issued $4,000,000 of 10-year, 11% bonds on January 4. The Bonds pay interest
semiannually on June 30 and December 31. If the current market rate of interest is 10%, at what
price will the bonds sell for?

Solution#3:
Interest payment $4,000,000 x 11% x ½ year = $220,000
Number of periods 10 years x 2 = 20
Interest rate per period 10% / 2 = 5%
PV of face amount $4,000,000 x .37689 $1,507,560
PV of interest 220,000 x 12.46221 2,741,686
Selling price of bond $4,249,246
This bond is selling at a premium – a price higher than its face value. The premium on this bond is
$249,246 ($4,000,000 – 4,249,246).
The price of the bond is 108.23 = 4,249,246 / 4,000,000.

Example #4
The next year, Beta Company issued $4,000,000 of 10-year, 11% bonds on January 4. The Bonds pay
interest semiannually on June 30 and December 31. If the current market rate of interest is 12%, at
what price will the bonds sell for?

Solution#4:
Interest payment $4,000,000 x 11% x ½ year = $220,000
Number of periods 10 years x 2 = 20
Interest rate per period 12% / 2 = 6%
PV of face amount $4,000,000 x .31180 $1,247,200
PV of interest 220,000 x 11.46992 2,523,382
Selling price of bond $3,770,582

This bond is selling at a discount – a price less than its face value. The discount on this bond is
$229,418 ($4,000,000 – 3,770,582).
The price of the bond is 94.26 = 3,770,582 / 4,000,000.

Example #5:
A $2500 bond pays interest at 8% semi-annually and is redeemable at par at the end of 5 years.
Determine the purchase price to yield a holder, if the bond pays 10% compounded annually.

Solution #5:
Using Financial Calculator

Step 1: Calculate the present value of redemption price.

P/Y=2
C/Y=2
FV=2500
N=5 x 2=10
I/Y=10
PV of redemption price = −1534.78

Step 2: Calculate the present value of the interest payments.

PMT= 2500 x 0.08/2 = 100
P/Y=2
C/Y=2
FV=0
N=5 x 2=10
I/Y=10
PV of interest payments = −772.17
Purchase price = $1534.78 + $772.17 = $2306.95
SINKING SCHEDULE

Rasheed Furnishings issued bonds worth $500,000 to expand its factory. It established a sinking fund
to retire this debt in three years and made deposits into it at the end of every six months. If the fund
was earning 7% compounded semi-annually, calculate the size of the periodic payment deposited
unto the fund.

FV =500,000 PMT =? (end )

m p=2 t=3 n=m p∗t=2∗3=6
j 0.07
mi=2 j=0.07 i= = =0.035
mi 2

FV =PMT ¿

500,000=PMT ¿

PMT =$ 76,334.10433→ $ 76,334.11( rounded up¿the next cent )

The size of the periodic payments deposited was $76,334.11.

Book Value = Future Value – Fund balance

Payment Payment Interest Increase in Fund Book

Period (PMT) Earned The Fund Balance Value
(BV)
0 0.00 500,000.00
1 76,334.11 0.00 76,334.11 76,334.11 423,665.89
2 76,334.11 2671.69 79,005.80 155,339.91 344,660.09
3 76,334.11 5436.90 81,771.01 237,110.92 262,889.08
4 76,334.11 8298.88 84,632.99 321,743.91 178,256.09
5 76,334.11 11,261.04 87,595.15 409,339.06 90,660.94
6 76,334.11 14,326.87 990,660.98 500,000.04 -0.04
Total $458,004.66 $41,995.38 $500,000.04

When we have a fund balance of 0, there are still $500,000 left to be accumulated.
Book Value=500,000−0=$ 500,000

When we have a fund balance of $237,110.92, there are still $262,889.08 left to be accumulated to
reach the $500,000 goal.
Book value=500,000−237,110.92=$ 262,889.08