LESSON 4: AMORTIZATION
AMORTIZATION OF THE DEBT
Amortization means the gradual extinction of any amount by any method of payment. An amortized
debt means, the total liabilities as to the original amount borrowed and the interest are extinguished by a
sequence of equal payments due at the end of equal interval of time.
When a debt is amortized, the payments form an annuity in which the present value is the original
amount of the debt. The following formulas are to be used.
1 1 i n
A R
i
For the present value: where: A = present value
iA
R
1 1 i
n
For the periodic payment: R = periodic payment
j
i = nominal rate m
n = no. of conversion periods
n mt
EXAMPLE 1
A debt of P10, 000 with the interest of 8% payable quarterly is to be amortized by equal payments at
1
1
the end of each 3 months for 2 years. Find a) the periodic payment and b) construct the amortization
schedule.
1
41
Given: A = P10, 000 n mt 2 6
j 8%
i 2% 0.02
j = 8% m 4
1
t 1
2 years
m = 4 (payable quarterly)
Solution:
A. The Periodic Payment
iA
R
1 1 i
n
10000 0.02
1 0.02
6
R P1,785.26 (quarterly payment)
B. Amortization Schedule
Payment No. Unpaid Principal Interest Payment Repayment of Principal
1 P10, 000 P200 P1, 785.26 P1, 585.26
10,000(0.02) P1,785.26 - P200
2 P8, 414.74 P168.29 P1, 785.26 P1, 616.97
(10,000 - 1,585.26) (8,414.74 x 0.02) (1, 785.26 - 168.29)
3 P6, 797.77 P135.96 P1, 785.26 P1, 649.30
(8, 414.74 - 1, 616.97) (6, 797.77 x 0.02) (1, 785.26 - 135.96)
4 P5, 148.47 P102.97 P1, 785.26 P1, 682.29
(6, 797.77 - 1, 682.29) (5, 148.47 x 0.02) (1, 785.26 - 102.97)
5 P3, 466.18 P69.32 P1, 785.26 P1, 715.94
6 P1, 750.24 P35.00 P1, 785.26 P1, 750.26
P711.54 P10, 711.56 P10, 000.03*
EXAMPLE 2
1
7 %
A debt for the purchase of computer unit will be discharged, principal and interest at 2
compounded semi - annually by paying P6, 000 at the end of each 6 months for 3 years.
a) Find the cash value of the computer unit.
b) Construct the amortization schedule.
Given: R P 6,000 n mt 2(3) 6
1
7 %
1 j 2 3 3 % 0.0375
j7 % i
2 m 2 4
t = 3 years
m = 2 (conversion period is semi - annually)
Solution:
A) The cash value
1 1 i n
A R
i
1 1.0375 6
6,000
0.0375
A P31,710.43
B) Amortization schedule
Payment No. Unpaid Principal Interest Payment Repayment of Principal
1 P31, 710.43 P1, 189.14 P6, 000 P4, 810.86
2 P26, 899.57 P1, 008.73 P6, 000 P4, 991.27
3 P21, 908.30 P 821.56 P6, 000 P5, 178.44
4 P16, 729.86 P 627.37 P6, 000 P5, 372.63
5 P11, 357.23 P 425.90 P6, 000 P5, 574.10
6 P 5, 783.13 P 216.87 P6, 000 P5, 783.13
P 4, 289.57 P36, 000 P31, 710.43
SUMMARY:
Column 1: Total number of payment, define by the number of conversion periods (n).
Column 2: For the 1st payment it is the present value. For the 2nd and the succeeding payments is to
subtract the preceding unpaid principal by the repayment of principal.
Column 3: Multiply the unpaid principal by the interest (i).
Column 4: It is the periodic payment (R). The payment is constant.
Column 5: Subtract the payment by the interest.
NOTE: To check if amortization schedule is correct, subtract the total payment by the total interest, it
should
be equal to the present value (A).
ACTIVITY: AMORTIZATION
NAME: SCORE:
YEAR & SECTION:
Perform as indicated. Show the necessary
solutions. 4) In purchasing a machine, Mr. Sy agrees to pay
P7, 000 at the end of each 3 months for 2 years. If
1) An obligation will be amortized by monthly these payments include interest at 10% payable
payments of P1, 250 for 7 years. If interest is at 9% quarterly on the unpaid balance, find the original
compounded monthly, find the present value. cash value of the machine.
Given: Given:
Solution: Solution:
2) An obligation of P5, 000 is to be amortized by
equal payments at the end of each year for 5 5) Mr. Aquino owes P70, 000 from CTM Bank
years. If interest is 6% compounded which credits 8% converted annually. He agreed to
annually,compute for the periodic payment. pay at the end of each year for 6 years.
Given: a) How much is the annual payment?
b) Prepare the amortization schedule.
Solution:
3) A man purchases a motorcycle for P70, 000 and
pays P20, 000 down payment. The balance, with 6) A debt of P75, 000 with interest at 8% payable
interest at 12% compounded monthly will be semi - annually will be amortized by equal
amortized for the next 2 years. Find the monthly payments at the end of each 6 months for 5 years.
payment. a) Find the semi - annual payment.
Given: b) Construct the amortization schedule.
Solution:
NOTE: Please submit this activity thru my email
(
[email protected]) on or before June 1,
2020.
This is your last lesson and activity. Please
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