MATHEMATICS OF INVESTMENT

MODULE NO. 6

A. LESSON
LEARNING OBJECTIVE TOPIC
• Solve worded problems on • Amortization
amortization.

B. DISCUSSION

Amortization is a means of repaying a debt by series of equal payments at equal time interval.
The periodic payments form an annuity in which the present value is the principal of an interesting-
bearing debt. Hence we use the following annuity formulas:

1 − (1 + 𝑖)−𝑛
𝐴 = 𝑅( )
𝑖
𝐴𝑖
𝑅=
1 − (1 + 𝑖)−𝑛
Where: A – principal
R – periodic payment
i – interest per period
n – total number of payments periods
Examples:

1. An obligation of P21,000 with interest of 8% compounded semi-annually must be paid at the

end of every 6 months for 4 years.
a. Find the size of periodic payment.
b. Find the remaining liability just after making the 5th payment.
c. Prepare the amortization table.

SOLUTION:

A = P21,000 m = 2 i = 0.04 j = 8% t = 4 years n=8

a. Find the size of periodic payment.

𝐴𝑖
𝑅=
1 − (1 + 𝑖)−𝑛

(21,000)(0.04)
𝑅= = 𝑷𝟑, 𝟏𝟏𝟗. 𝟎𝟖
1 − (1 + 0.04)−8

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 b. Find the remaining liability just after making the 5th payment.

The remaining liability after the 5th payment is the present value of the remaining periodic
payments.

1 − (1 + 𝑖)−𝑛
𝐴 = 𝑅( )
𝑖

1 − (1 + 0.04)−3
𝐴 = 3,119.08 ( ) = 𝑷𝟖, 𝟔𝟓𝟓. 𝟕𝟑
0.04

d. Amortization schedule.

Period Balance Payment Interest Paid Payment for

Principal
1 P21,000.00 P3,119.18 P840.00 P2,279.08
2 18,720.92 P3,119.18 748.84 2,370.24
3 16,350.68 P3,119.18 654.03 2,465.05
4 13,885.63 P3,119.18 555.43 2,563.65
5 11,321.98 P3,119.18 452.88 2,666.20
6 8,655.78 P3,119.18 346.23 2,772.85
7 5,882.93 P3,119.18 235.31 2,883.76
8 2,999.16 P3,119.18 119.97 2,999.11
Total P24,952.64 P3,953.10 P21,000*

*The actual value is P20,999.94. This is due to rounding error.

Discussion of the amortization table.

First Column: PERIOD

This pertains to the number of payments indicated in the problem.

Second Column: BALANCE

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 The first balance is the amount of the principal. The second amount in the balance
column can be computed by subtracting the Payment for principal from the previous balance.

Ex: P21,000 – 2,279.08 = P18,720.92

P18,720.92 – 2,370.24 = P16,350.68

Third Column: PAYMENT

This is the computed periodic payment.

Fourth Column: INTEREST PAID

This is computed by multiplying the balance by the value of i.
Ex: P21,000 x 0.04 = P840
P18,720.92 x 0.04 = P748.84

Fifth Column: PAYMENT FOR PRINCIPAL

This is computed by subtracting the INTEREST PAID from the PAYMENT.
Ex: P3,119.08 – 840 = P2,279.08
P3,119.08 – 748.84 = P2,370.24

The total for the last column which is the PAYMENT FOR THE PRINCIPAL should be
equal to the given principal in the problem.

C. REFERENCES

Young, F. (2009). Mathematics of Investment Made Simple. Rex Book Store

Sirug, W. (2014). Mathematics of Investment. Mindshapers Co., Inc.

Altares, P. et. al., (2007). Mathematics of Investment. Rex Book Store

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Name: Year/Program/Major: Score:

D. EVALUATION

Answer the following:

1. A debt of P70,000.00 with 8% converted quarterly must be paid at the end of every 3 months
for 3 years.
a. Find the size of each payment.
b. Find the remaining liability after the 4th payment.
c. Construct the amortization schedule.

2. Nikko borrows a certain sum with interest at 9% compounded semi-annually. The obligation
will be discharged by paying P7,000 every end of 6 months for 4 years.
a. What is the present value of Nikko’s debt?
b. How much of his 3rd payment is interest and how much goes to repayment of principal?
c. Prepare the amortization table.

3. A loan of P140,000 bearing a 15% interest converted annually is to be amortized with equal
yearly payments for 10 years.
a. Find the size of each payment.
b. What should the outstanding liability be just after 4th payment?
c. Construct the amortization schedule.

4. Aster borrows P360,000. She plans to amortize her debt with equal quarterly payments for 2
years. Interest is allowed at 11% converted quarterly.
a. Find the quarterly cost of her debt.
b. By how much is the debt reduced by the 3rd payment?
c. Construct the amortization schedule.

5. A loan of P100,000 with interest at 10% converted quarterly will be settled by paying P12,000
at the end of every 3 months.
a. How many payments amounting P12,000 will be made?
b. What final smaller payment is needed?
c. Construct the amortization schedule.

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