AMORTIZATIO

N
AND
SINKING FUND
A. AMORTIZATION
Amortization is a debt-repayment scheme wherein the original
amount borrowed is repaid by making equal payments periodically.

In the amortization problems, we usually want to find the value of

the periodic payment, the outstanding principal at the end of any period, the
interest payment for any period, the principal repayment for any period and
the final irregular payment, if there is any.

The formula for determining the periodic payment R is given by

where A is the amount loaned, i is the interest rate per period, and n
is the total number of payment periods.
B. OUTSTANDING PRINCIPAL
Outstanding principal (or outstanding balance) refers to the amount
of debt still unpaid. We have two formulas for determining the outstanding
principal at the end of any period k:

and

The first formula computes the outstanding principal as the present

value of all payments still to be made (prospective method). You use this
when n is known.

The second computes the outstanding principal as the future value of

the debt at period k minus the future value of all payments at period k
(retrospective method). You use this if n is not known or n is not exact.
C. AMORTIZATION SCHEDULE
An amortization schedule is a table which shows how a debt is
completely repaid through periodic payments, parts of which go to interest
payments and principal repayments.
Amortization Table:

Perio Periodic Outstanding

Interest Payment Principal Repayment
d Payment Principal

Related formulas:
IPk= (OBk-1) i , is the part of the kth regular payment which goes to the
payment of interest.
PRk= R - IPk , is the portion of the kth regular payment which goes to the
repayment of the principal.
Examples:

1. Find the monthly amortization for a P150,000 debt which is

to be repaid in 2 years at 7% compounded monthly.
Given: A=150,000, t=2, j=.07 and m=12.
Solution:
2. A photo studio took out a P750,000 bank loan and plans to repay it through
5 annual amortizations. If the bank charged an interest of 9% compounded
annually, find the outstanding principal after the 3rd year.
Since the interest is compounded annually, the required amount is . From the
problem, we know A=750,000, n=5, j=.09, and m=1. We need to get R first.

Solution:

Continuing, we have
3. A travel agency moved to a new building to service a bigger client pool. The
building was acquired through a P15M bank loan with 12% interest
compounded monthly. If the agency amortizes the loan with monthly P200,000
payments, what is the outstanding balance in 5 years?
Solution:
Since, interest is compounded monthly, the outstanding
balance in 5 years is We know that A=15M, j=.12, m=12, and R=200,000. But
we do not know n. Hence, we will use the retrospective method:
4. A P 65,000 loan at 12% compounded semi-annually is to be amortized
every 6 months for 3 years. Find the semi-annual payment and construct
an amortization table.
Given: A=65,000 j=.12 m=2
t=3 i=.06 n=6

Solution:
Next, we construct the table.
Step 1: Prepare the table with the indicated column headings and 7 more rows
(we have 6 periods).

Periodic Interest Principal Outstanding

Period
Payment Payment Repayment Principal

6
Step 2: Place the original debt and the periodic payments.

Perio Periodic Interest Principal Outstanding

d Payment Payment Repayment Principal

1 13218.57

2 13218.57

3 13218.57

4 13218.57

5 13218.57

6 13218.57
Step 3:
•Get the interest payment for the first period: (65,000)(.06) = 3,900
•Subtract this from the regular payment to get the principal repayment for the
first period: 13,218.57 – 3,900 = 9,318.57
•Finally, deduct the principal repayment 9,318.57 from the debt to get the
outstanding principal at the end of the first period: 65,000 – 9,318.57 =
55,681.43
•Place these values in the table.

Perio Periodic Interest Principal Outstanding

d Payment Payment Repayment Principal

1 13218.57 3900.00 9318.57 55,681.43

2 13218.57
3 13218.57
4 13218.57
5 13218.57
6 13218.57
Step 4: Repeat Step 3 for the other rows to get the following:

Periodic Interest Principal Outstanding

Period
Payment Payment Repayment Principal

1 13218.57 3900.00 9318.57 55681.43

2 13218.57 3340.89 9877.68 45803.75

3 13218.57 2748.23 10470.35 35,633.40

4 13218.57 2120.00 11098.57 22,434.83

5 13218.57 1454.09 11764.48 12470.35

6 13218.57 748.22 12470.35 0.00

5. Tim borrows P 200,000 today and agrees to repay the loan via equal
payments at the end of each 3 months for 3 years, with interest at 8%
payable quarterly incorporated in each payment. Show the amortization table
for the first four periodic payments.

Given: A= 200,000, i=.02, n = 12

Solution:
Construct the amortization schedule:

Periodic Interest Principal Outstanding

Period
Payment Payment Repayment Principal

1 18,911.92 4000.00 14,911.92 185,088.08

2 18,911.92 3701.76 15,210.16 169,877.92

3 18,911.92 3397.56 15,514.36 154,363.56

4 18,911.92 3087.27 15,824.65 138,538.91

D. SINKING FUNDS
A sinking fund is a fund-accumulation scheme, wherein the amount
is generated by making periodic deposits. The deposits may be regular or
irregular. However, in this discussion, we assume that the amount of any
sinking fund deposit is the same, that is, they form an ordinary annuity.

Periodic Deposit and Amount in the Fund

The amount in the fund after any kth deposit is given by:

Where 1≤ k ≤ n, D is the sinking fund deposit, and i is the interest rate earned
by sinking fund.
We can also solve the previous equation for D:
E. SINKING FUND SCHEDULE
A sinking fund schedule is a table which shows how a target
amount is completely attained through periodic deposits as well as interest
these deposits earn in the process.

Related formulas:
, is the interest earned in the kth deposit period, this is equivalent to

If you want to find out how much the fund increased in the value in a
particular period, you subtract the amount in the beginning of the period
from the amount in the end. In symbols,

A shorter formula is
Examples:

1. Jenny wants to have P500,000 in 5 years. She deposits an amount every six
months in a sinking fund earning 6% compounded semi-annually. What is her
semi-annual deposit?

Solution: ,

= P 43,615.25
2. A group wants to raise P950,000 in 2 years by depositing a particular
amount every 3 months in a fund that earns 8% compounded quarterly. Find
out how large should this amount be. Construct a sinking fund schedule.

Solution: , k=8,
We now get D.

= P 110,684.31
Next, we construct the sinking fund table.

Step 1: Prepare the table with the indicated column headings and 8 more rows.

Amount at
Interest Periodic Amount at the
Period the
earned Deposit end
beginning
1
2
3
4
5
6
7
8
Step 2: Place the value across the first periodic as indicated.

Amount at Interest Amount at the

Period Periodic Deposit
the beginning earned end

1 0 0 110,684.31 110684.31
2 110684.31 2213.69 110,684.31 223,582.31
3 223,582.31 4471.65 110,684.31 338,738.27
4 338,738.27 6774.76 110,684.31 456,197.34
5 456,197.34 9123.95 110,684.31 576,005.60
6 576,005.60 11,520.11 110,684.31 698,210.02
7 698,210.02 13964.20 110,684.31 822,858.53
8 822,858.53 16457.17 110,684.31 950,00.01
Step 3:
•The amount at the beginning of the 2nd period (110684.31) is also the amount at the end
of the first.
•This will earn interest: (110684.31) (.02)= 2213.69
•Then, you make another 110684.31 periodic deposit.
•By the end of the 2nd period, you now have 110684.31 + 2213.69+ 110684.31=
223,582.31 in the fund.
•Place these values in the table.

Perio Amount at the

Interest earned Periodic Deposit Amount at the end
d beginning
1 0 0 110684.31 110684.31
2 110684.31 2213.69 110684.31 223,582.31
3 223,582.31 4471.65 110684.31 338,738.27
4
5
6
7
8
Step 4: repeat step 3 for the other rows to get the following. The amount in the
fund at the end of the term (end of 8th Period) is P950,000.00

Perio Amount at the

Interest earned Periodic Deposit Amount at the end
d beginning

1 0 0 110684.31 110684.31

2 110684.31 2213.69 110684.31 223,582.31

3 223,582.31 4471.65 110684.31 338738.27

4 338738.27 6774.77 110684.31 456197.35

5 456197.35 9123.95 110684.31 576005.61

6 576005.61 11520.11 110684.31 698210.03

7 698210.03 13964.20 110684.31 822858.54

8 822858.54 16457.17 110684.31 950,000.01

Thank you!!!