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AMORTIZATION
AND SINKING FUNDS
By group 4

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AMORTIZATION
• Gradual extinction of a debt over a period
of time by means of a sequence of equal
payment as to principal and interest due
at the end of equal intervals of time.

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Amortization
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• A debt that is amortized by equal periodic or instalment payments at equal
intervals of time becomes the present value of a simple annuity.
Hence we use the formulas:

1  (1  i )  n
R
A
A  R  1  (1  i ) n

 i  i
Where,
• A = present Value R = periodic or equal payments
• n = number of conversion periods i = interest rate per conversion period

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EXAMPLES:
1. A man obtains a loan of ₱60,000.00 to be amortized
by equal payments at the end of each six months for
3 years at 10% interest compounded semi-annually.
Find the periodic payment.

Given: A = ₱60,000.00 r = 10% i = 5% ( 10% / 2)

n = 6 (3 years x 2) t=3

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 Given: A = ₱60,000.00 r = 10% i = 5% ( 10% / 2)
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n = 6 (3 years x 2) t = 3

Solve:
A 60,000
R 
1  (1  i )  n 1  0.7462154
i 0.05

60,000 60,000
 
1  (1  5%) 6
5.075692
5%

Answer: ₱ 11,821.05
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EXAMPLES:
2. Mr. Santos is required to pay 5 annual instalments
of ₱25,000.00 each for a loan at 10% compounded
annually. How much is his loan?

Given: R = ₱25,000.00 i = 10 n=5

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Click to editRMaster
Given: title style i = 10
= ₱25,000.00 n=5

Solve:

1  (1  i )  n 1  0.6209213 
 25,000 
A  R   .10 

 i 
 25,000(3.790787)
1  (1  10%) 5 
 25,000  
 10% 
Answer: ₱ 94,769.67
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Amortization Schedule
The table that shows the amount paid to
the interest and to the principal, and the
reduction of the outstanding principal
after each payment period.
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 Using the preceding Example 1 in which the periodic payment of ₱ 11,821.05 is
Click tofrom
obtained editA Master title rstyle
= ₱60,000.00, = 10% n = 6 t = 3 years, construct an
amortization schedule. SOLUTION:

Period Periodic payment Interest at 10% Amount repaid to Outstanding

at the end of due at the end of the principal at principal at end
each 6 months every 6 months the end of each 6 of each 6 months
months
0 ₱60,000.00
1 ₱11,821.05 ₱3,000.00 ₱8,821.05 ₱51,178.95
2 ₱11,821.05 ₱2,558.95 ₱9,262.10 ₱41,916.85
3 ₱11,821.05 ₱2,095.84 ₱9,725.21 ₱32,191.64
4 ₱11,821.05 ₱1,609.58 ₱10,211.47 ₱21,980.17
5 ₱11,821.05 ₱1,099.01 ₱10,722.04 ₱11,258.16
6 ₱11,821.05 ₱562.91 ₱11,258.14 ₱0.00
TOTAL ₱70,926.30 ₱10,929.29 ₱60,000.00
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 Using the preceding Example 1 in which the periodic payment of ₱ 11,821.05 is
Click tofrom
obtained editA Master title rstyle
= ₱60,000.00, = 10% n = 6 t = 3 years, construct an
amortization schedule. SOLUTION:

The amortization schedule is prepared by the following steps below:

a) Find the interest in the first period using:

i = Prt = 60,000 x 10 x 0.5

i= 60,000 x 6 months / 12 months = 3,000

b) Determine the amount repaid to the principal at the end of the first period
(6 months) by subtracting the interest from the periodic payment.

Amount repaid = ₱11,821.05 - ₱3,000.00

(1st period) = ₱8,821.05

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 Using the preceding Example 1 in which the periodic payment of ₱ 11,821.05 is
Click tofrom
obtained editA Master title rstyle
= ₱60,000.00, = 10% n = 6 t = 3 years, construct an
amortization schedule. SOLUTION:

The amortization schedule is prepared by the following steps below:

c) Compute the outstanding principal at the end of the first period by subtracting
the amount repaid from the outstanding principal.

Outstanding principal = ₱60,000 - ₱8,821.05

(end of 1st Period) = ₱51,178.95

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d) Repeat the procedures above to obtain the figures
for the second to the sixth period.

Note that:

1. The amount of the original loan is equal to the total

repayments on the principal.
2. The amount of the original loan is the outstanding principal at
the beginning of the term.
3. The outstanding principal is equal to 0 at the end of the term.
4. The interest payments decrease, while the payments on the
principal increase towards the end of the term. 12
Given: A = ₱50,000.00, R= ₱ 9600.00 r = 8% ,
Click to edit
a) construct Master title
an amortization style
schedule
b) determine the amount of final or concluding payment
SOLUTION:
Period Periodic payment Interest at 8% Amount repaid to Outstanding
at the end of due at the end of the principal at principal at end
each 6 months every 3 months the end of each 3 of each 6 months
months
0 ₱50,000.00
1 ₱9,600.00 ₱1,000.00 ₱8,600.00 ₱41,400
2 ₱9,600.00 ₱828.00 ₱8,772.00 ₱32,628.00
3 ₱9,600.00 ₱652.56 ₱8,947.44 ₱23,680.56
4 ₱9,600.00 ₱473.61 ₱9,126.39 ₱14,554.17
5 ₱9,600.00 ₱291.08 ₱9,308.92 ₱5,245.25
6 ₱5,350.16 ₱104.91 ₱5,245.25 ₱0.00
TOTAL ₱53,350.16 ₱3,350.16 ₱50,000.00
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Click to edit Master title style

SINKING FUND
• A systematic accumulation of money by
making equal periodic deposits that will result
to the desired sum of money at desired time is
known as investing in a sinking fund. In other
words, in a sinking fund, the periodic deposits
are invested until the desired maturity value or
date is reached. 14
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Formula:

 (1  i )  1 n
R
S
S  R   
(1  i )  1
n

 i  i
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Examples:

1. A sum of ₱200,000.00 will be needed every end of

3 months to purchase a lot at the end of 2 years. If
money is deposited at 12% compounded quarterly,
find the periodic payment.
Given: S = ₱200,000.00 r = 12% (m=4) t = 2years

Solution: i = 3% (12%/4) n = 8 (2 years x 4)

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Examples:
Given: S = ₱200,000.00 r = 12% (m=4) t = 2years i = 3% n=8

a) The periodic payment:

S 200,000 200,000
R  

(1  i )  1
n
  (1  3%) n  1
 
1.2667701  1
 3% 
 .03 
i

200,000 Answer:

8.892336 ₱ 22,491.28 17
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Examples:

2. A man makes an equal quarterly periodic

investment of ₱10,000.00 for 2 years that pays an
interest rate at 12% (m=4). How much money will he
have after 2 years?
Given: R = ₱10,000.00 r = 12% (m=4) t = 2years

Solution: i = 3% (12%/4) n = 8 (2 years x 4)

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Examples:
Given: R = ₱10,000.00 r = 12% (m=4) t = 2years i = 3% n=8

a) Sum of the money in the fund after 2 years:

 (1  i )  1
n
 (1  3%)  1 8

S  R   10,000  
 i   3% 
 10,000(8.892336) Answer:₱ 88,923.36
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Sinking
Click to fund schedule
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Refer to example 1.
Given: S = ₱200,000.00 r = 12% (m=4) t = 2years
R = ₱22,491.28 i = 3%

The sinking fund is prepared by the following steps:

a) Use the first sinking fund deposit of ₱22,491.28 as the amount of fund at the end of
first period, wherein no interest has been earned yet.
b) The periodic deposit of ₱22,491.28 is the amount of the fund at the start of the
second period and which earns interest using I = Prt
c) Determine the amount of the fund at the end of the second period by obtaining the
sum of the fund at the start of the period, the interest obtained in Step No.2 and the
periodic deposit as follows.
d) Repeat the procedures above to obtain the entries for third to the eight period.

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Given: S = ₱200,000.00 r = 12% (m=4) t = 2years
Click to edit Master title style
R = ₱22,491.28 i = 3%
Number of Fund at the start Interest at 3% at Amount of Amount of fund at
Payment of the period the end of the year periodic deposit the end of the year

1 0.00 0.00 ₱22,491.28 ₱22,491.28

2 ₱22,491.28 ₱674.74 ₱22,491.28 ₱45,657.30
3 ₱45,657.30 ₱1,369.72 ₱22,491.28 ₱69,518.30
4 ₱69,518.30 ₱2,085.55 ₱22,491.28 ₱94,095.13
5 ₱94,095.13 ₱2,822.85 ₱22,491.28 ₱119,409.26
6 ₱119,409.26 ₱3,528.28 ₱22,491.28 ₱145,482.82
7 ₱145,482.82 ₱4,364.48 ₱22,491.28 ₱172,338.58
8 ₱172,338.58 ₱5,170.16 ₱22,491.28 ₱200,000.02
TOTAL ₱20,069.78 ₱179,930.24

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Click
QUIZ:to edit Master title style
1. A debt of ₱45,000.00 with an interest rate of 8%
compounded quarterly will be amortized for 1 year
and 6 months. How much is the quarterly
amortization?

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