SINKING FUND AND

MATHEMATICS LOAN
AMORTIZATION 𝐴

[ ]
𝑅=

( )
𝑚𝑡
𝑖
1+ −1
𝑚
𝑖
𝑚
𝑃

[ ]
𝑅=

( )
−𝑚𝑡
𝑖
1 − 1+
𝑚
𝑖
𝑚
SINKING FUND AND
MATHEMATICS LOAN
AMORTIZATION 𝐴

[ ]
𝑅=

( )
𝑚𝑡
𝑖
1+ −1
𝑚
𝑖
𝑚
𝑃

[ ]
𝑅=

( )
−𝑚𝑡
𝑖
1 − 1+
𝑚
𝑖
𝑚
SINKING FUND AND
MATHEMATICS LOAN
AMORTIZATION 𝐴

[ ]
𝑅=

( )
𝑚𝑡
𝑖
1+ −1
𝑚
𝑖
𝑚
𝑃

[ ]
𝑅=

( )
−𝑚𝑡
𝑖
1 − 1+
𝑚
𝑖
𝑚
 Annuities have many applications such as in
nominal funds. An example of nominal funds are
sinking funds which are funds formed to
accumulate a certain amount at a certain period
of time.
A sinking fund is a fund established to meet
future needs or obligations by making payments
or deposits into the fund which called sinking
fund payments.
Example 1
A sinking fund is established to accumulate P100,000 in
6 years. If the annual interest rate is 5% compounded
yearly, find the amount of sinking fund payments. How
much is the total interest?
Given:
A = 100,000 𝐴

[ ]
𝑅=

( )
𝑚𝑡
t = 6 years 𝑖
1+ −1
𝑚
r = 5% or 0.05
𝑖
m=1 𝑚
R=?
Solution: 𝐴

[ ]
𝑅=

( )
𝑚𝑡
A = 100,000 𝑖
1+ −1
𝑚
t = 6 years
𝑖
r = 5% or 0.05 𝑚
m=1 100,000

[ ]
𝑅=

( )
( 1)( 6)
0.05
1+ −1
1
0.05
1

𝑅= Php14 , 701.7 5
Continuation:
R = 14,701.75 𝐼 = 𝐴 − 𝑅𝑡𝑚
t = 6 years
m=1
A= 𝐼 =  100,000 − 88,210.50

𝐼 = Php 11,789.50
Example 2
To prepare for an expansion of their business, Mr. Alvarez
formed a sinking fund where monthly deposits will be made to
accumulate at least P50,000. If 3% interest compounded
monthly is given to the fund, how much should the monthly
payment be to achieve the desired amount in one year?
Given:
𝐴
A = 50,000

[ ]
𝑅=
t = 1 year (
1+
𝑚 )
𝑖 𝑚𝑡
−1
r = 3% or 0.03 𝑖
m = 12 𝑚
R=?
Solution: 𝐴

[ ]
𝑅=

( )
𝑚𝑡
A = 50,000 𝑖
1+ −1
𝑚
t = 1 year
𝑖
r = 3% or 0.03 𝑚
m = 12 50,000

[ ]
𝑅=

( )
( 12)( 1)
0.03
1+ −1
12
0.03
12

𝑅= Php 4,109.68
 Another application of annuities is
amortization. Suppose a certain amount is
borrowed today or a certain property is bought
through a loan, then amortizing a debt or loan
means giving equal payments at regular
intervals until the debt or loan is fully paid.
Amortization is the process of paying a loan
or a debt by means of providing equal regular
payments considering the compound interest
earned.
Example 3
How much should one pay annually to amortize a loan
worth P2,500,000 at an interest rate of 2% compounded
annually for 10 years? How much is the total interest?
Given:
A = 2,500,000
𝑃

[ ]
t = 10 years 𝑅=

( )
−𝑚𝑡
𝑖
r = 2% or 0.02 1 − 1+
𝑚
m=1 𝑖
R=? 𝑚
Solution: 𝑃

[ ]
𝑅=

( )
−𝑚𝑡
A = 2,500,000 𝑖
1 − 1+
𝑚
t = 10 years
𝑖
r = 2% or 0.02 𝑚
m=1 2,500,000

[ ]
𝑅=

( )
−( 1)( 10)
0.02
1 − 1+
1
0.02
1
Continuation:
R = 278,316.32 𝐼 = 𝑅𝑡𝑚 − 𝑃
t = 10 years
m=1
P = 2,500,000 𝐼 =2,783,163.20 − 2,500,000

𝐼 =Php 283,163.20
Practice Exercises
1. To prepare for their son’s college studies, Mr. and Mrs.
Magpantay put up a sinking fund at 3% interest rate
compounded monthly. In 4 years, the fund must have
P200,000. How much monthly payment must be put into
the sinking fund?
2. The Reyes Family made a loan of P750,000 to buy a new
house. They decided to amortize the loan at 3% interest
rate compounded quarterly. If the loan must be paid within
5 years, how much should the Reyes Family pay quarterly?
How much is the total interest?
3. A sinking fund is established in order to prepare for the
replacement of equipment in a business firm in Batangas. It
is estimated that the total amount required for the sinking
fund is P2,000,000. If the owner of the firm wants to
accumulate the needed amount after 10 years, how much
must be the sinking fund payments if the interest rate is 2%
compounded semi-annually?
4. You want to purchase a pre-owned car worth P200,000.
The current owner of the car suggested that you pay him
P70,000 initially, and then amortize the remaining 2%
interest compounded monthly for the next 2 years. How
much must you pay monthly?
5. You can borrow P50,000 from Firm A in exchange of
P55,000 that is to be paid by making equal monthly
payment at 0% interest for 18 months. You can borrow the
same amount from Firm B in exchange of paying the
amount that is amortized at 3% interest compounded
monthly for the next one and a half year. Which lending
firm will you choose to borrow in order to have lower
monthly payments?
Answers:
1. R = Php 3,926.87
2. R = Php 40,522.97; I = Php 60,459.48
3. R = Php 90,830.63
4. R = Php 5,530.23
5. Monthly payment for Firm A is Php 3,055.56. Monthly
payment for Firm B is Php 2,844.22. Borrowing from Firm
B requires lower monthly payment.