EXTINCTION OF DEPT

Name: Christian Jake M. Eculla

C/Y/S: BSED-MATH 2C

Mr. Ricky T. Osorio

instructor

MM8 - MATHEMATICS OF INVESTMENT

 SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

BASE DEFINITIONS
Designing the debt extinction plan is one of the main aspects of long-
term obligation management. The main task for this lies in
constructing a schedule of debtor's periodic payments. They are
commonly known as debt service, immediate payments which are the
debtor's expences for the loan. The debt service payments include
both the interest and the money to pay off main debt value.
The methods to find time payments size are significantly dependent
upon the debt extinction terms specified by contract, the longevity of
grace period, the rate of interest and its type, the method used for
paying the interest, and the method used for paying the debt itself.

C.J.M.ECULLA, 2022 | Page 2

 SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

NOTATIONS

We shall use the next notations:

D —debt value;
Y —time payment value;
I —interest value;
R —debt service value;
g —rate of interest for the debt;
n —due period;
L —grace period longevity.

C.J.M.ECULLA, 2022 | Page 3

SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

NOTATIONS

By definition the debt service (that can also be time payment in

different cases) is found as Y = I+R.

If there is a grace period when only the interest is paid, the debt
service for this period is reduced to Y=I.

C.J.M.ECULLA, 2022 | Page 4

 SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

AMORTIZATION

Amortization is the means of extinguishing debt by making partial payments

on it over a period of time. The ways for using amortization are:

• paying the base debt value by equal sum values (equal proportions)

• paying the entire obligation by equal partial debt service payments.

C.J.M.ECULLA, 2022 | Page 5

SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

AMORTIZATION

C.J.M.ECULLA, 2022 | Page 6

SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

MAKING TIME PAYMENTS ON THE ENTIRE

OBLIGATION VALUE

C.J.M.ECULLA, 2022 | Page 7

 SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

SINKING FUNDS
If the loan contract implies the debtor return the sum at the end of due period as
a single payment, he needs to secure it. The usual measure when the loan value
is big, is to create a sinking fund. The necessity of the fund creation sometimes
is specified in the loan granting contract to guarantee full payment.

Creating a sinking fund is not necessarily connected with debt extinction. In

practice sometimes it's necessary to accumulate funds for other reasons, for
example to replace depreciated equipment and so on.

The sinking fund is created from installments (i.e. regular payments) of the
debtor, for example, on a special bank account at some interest.

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SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

SINKING FUNDS

C.J.M.ECULLA, 2022 | Page 9

SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

THANK YOU FOR LISTENING!

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 SURIGAO DEL NORTE STATE UNIVERSITY
Narciso Street, Surigao City

REFERENCE
https://l.facebook.com/l.php?u=https%3A%2F%2Fwww.rea.ru%2Fru%2Forg%2Fcathedries%2FKafedra-
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%25D0%25B7.)%2F8_Extinction%2520of%2520debt.%2520Amortization.%2520Sinking%2520funds.pdf
%3Ffbclid%3DIwAR00ZH755xOG5cE-
PkmBbrY2OKX2lCMwqU_iiUz9FZwnwRSwQuyisXUiwRQ&h=AT1SPETBXCYV4K5GR1rctsZSCOFMx6xed45e
OWswDq6R-CQo6PftcMF7DQSmrmt119KBPLHT2YDAvA2jFCljr-
fnA7ojhzyA5mFaEReDq5usRUl4D5eeSqxL4ggFw6V1OYP_hg

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