Loan

Amortization
By
Prof. Ken Lagman Yumang
Time Value of Money
Solving for PMT in an Ordinary Annuity
• Instead of figuring out how much money
you will accumulate (i.e. FV), you may like
to know how much you need to save each
period (i.e. PMT) in order to accumulate a
certain amount at the end of n years.
• In this case, we know the values of n, i,
and FVn and we need to determine the
value of PMT.
TVM by KenYu
Time Value of Money
Solving for PMT in an Ordinary Annuity

Suppose that to have P500,000 savings

10 years from now. If you’re going to have
equal annual year-end deposit that pays
8%, how big do these annual deposits
need to be?

TVM by KenYu
Time Value of Money
Present Value of an Ordinary Annuity

PMT = annuity payment deposited or received at the

end of each period.
i = discount rate (or interest rate) on a per period basis.
n = number of periods for which the annuity will last.
TVM by KenYu
Time Value of Money
Present Value of an Ordinary Annuity

XYZ Corporation has just purchased some

government bonds that will yield interest of P15,000
at the end of each year, and will be held for 5 years.
What is the present value the stream of interest
receipts from the bonds if the discount rate is 12%?

TVM by KenYu
Time Value of Money
Present Value of an Annuity Due

PMT = annuity payment deposited or received at the

end of each period.
i = discount rate (or interest rate) on a per period basis.
n = number of periods for which the annuity will last.
TVM by KenYu
Time Value of Money
Present Value of an Annuity Due

XYZ Corporation has just purchased some

government bonds that will yield interest of P15,000
at the beginning of each year, and will be held for 5
years. What is the present value the stream of
interest receipts from the bonds if the discount rate
is 12%?
TVM by KenYu
Time Value of Money
Tips: Solving for PMT

If you have a FV amount and you’re looking for

PAYMENTS,
use FV formula.

If you have a PV amount and you’re looking for

PAYMENTS,
Use PV formula.

TVM by KenYu
Time Value of Money
Solving for PMT

Suppose that to have P500,000 savings

10 years from now. If you’re going to have
equal annual year-end deposit that pays
8%, how big do these annual deposits
need to be?

TVM by KenYu
Time Value of Money
Solving for PMT

If you’re going to have P________

equal annual year-end deposit that pays
8%, how much would you have 10 years
from now?

TVM by KenYu
Time Value of Money
Loan Amortization, a PV of Ordinary Annuity Application

In an amortized loan,
present value can be thought of as the
amount borrowed
n is the number of periods the loan lasts for
r is the interest rate per period
future value takes on zero because the loan
will be paid of after n periods
payment is the loan payment that is made.
TVM by KenYu
Time Value of Money
Loan Amortization, a PV of Ordinary Annuity Application

Loan Amortization Table

Suppose you plan to get a P600,000 car loan at 15 percent annual interest
with annual payments that you will pay off over 4 years. What will your
annual payments be? What would be the breakdown of principal and
interest over the life of the loan?

For annuity payment (PMT), use

the formula or the PVIF-A table.

TVM by KenYu
Time Value of Money
Loan Amortization, a PV of Ordinary Annuity Application

Amortized Loans with Monthly Payments

• Many loans such as auto and home loans require
monthly payments. This requires converting n to number
of months and computing the monthly interest rate. To
do this, use the mathematical formula below:

TVM by KenYu
Time Value of Money
Loan Amortization, a PV of Ordinary Annuity Application

Computing for the Outstanding Balance

of the Loan at anytime
Tip: The outstanding balance is the present value of
the remaining payments. Therefore, compute for (1)
PMT; (2) the remaining payment periods, n; then, (3)
use the appropriate PV formula.
For annual, use this. For monthly, use this.

TVM by KenYu
END
TVM by:
Prof. Ken Lagman Yumang

“In omnibus, amare et servire Domino.”

References: Brigham and Houston, Titman, Gitman, Brealey