AMORTIZATION

Objectives:
Upon finishing this chapter, you should be able to:
1. Define and correctively use terms associated with amortization;
1−( 1+ i )−n
2. Compute, using A=R
[ i ] and the amortization table

a. The periodic payment required to amortize a loan;

b. The total amount paid; and
c. The interest included in each payment; and
3. Prepare an amortization schedule to verify that the payment pay off the loan correctly.

Amortization
Amortization is the payment of debt, both the principal and interest by a sequence of (usually)
equal payments made at equal interval of time.
If a debt A, with interest at a rate of i per period, is amortized by n equal periodic payments (each
payment being made at the end of the period), the size of each payment is

i
R=A
[ 1−( 1+ i )−n ]
The indebtedness at any time is called the outstanding liability or the outstanding principal at that
time. The outstanding principal just after a payment has been made is the present value of all payments
yet to be made.

1−( 1+i )−(n−k)

Outstanding Principal=R [ i ]
, where n-k is the number of payments still to be made.

Equity. When property is bought by a sequence of partial payment, the buyer’s equity in the property at
any time is that part of the price of the property which he has paid. At the same time, the seller’s equity is
the part of the price of the property which remain to be paid, that is, the outstanding principal at the time.
Clearly, Buyer’s Equity + Seller’s Equity = Cash Price.
Example 1
Mr. Jose Cruz borrows P250,000 from Asia Bank for the expansion of his business. The bank
charges 16.2% compounded semi-annually. He repays the loan by regular installments at the end of every
6 months. If the loan is to be paid off in 5 years,
a) How much is his semi-annual payments?
b) What is his outstanding balance after 6 payments?
Solution:
Given: A = P250,000 t = 5 years
 j = 16.2% i = 8.1%
m=2 n = 10
To solve for the payment size,

i
R=A
[ 1−( 1+ i )−n ]
.081
R=P 250,000
[ 1−( 1.081 )
−10
]
R=P 250,000( 0.1497024)
R=P 37,425.59
To solve for the outstanding principal after 6 payments,

1−( 1+ i )−(n−k)
Ak =R [ i ]
1−( 1.081 )−(10−6 )
A6 =( P37,425.59 )
.081[ ]
1−( 1.081 )−4
A6 =( P37,425.59 ) [ .081 ]
A6 =P37,425.59 ( 3.3047678 )

A6 =P123,682.90
Example 2
A mortgage of P400,000 is to be paid by monthly payments over a period of 5 years. If the rate of
interest is 1.22% per month,
a) How much is the monthly payment?
b) How much is the outstanding principal after 40 payments?
Given: A = P400,000 t = 5 years m = 12
i = 1.22% n = 5 x 12 = 60
Required: R=? A40 = ?

i
R=A
[ 1−( 1+ i )
−n
]
.0122
¿ 400,000
[ 1−( 1.0122 )
−60
]
 ¿ P 9,440.55

1− ( 1+i )−(n−k)
A 40=R[ ]
i

¿ ( 9,440.55 ) [ 1−( 1.0122 )−(60− 40)¿ ¿ ¿ .0122 ]

A6 =9,440.55 ( 17.65203 )=P 166,644.87

Example 3
Mr. Joe Gomez purchased a new house and lot for P600,000 and made a 25% downpayment. The
rest was financed by a bank at 21% compounded monthly. If the loan is to be re-paid in 10 years,
a) How much is his monthly payment?
b) How much is his equity after the 50th payment?
Given: A = 600,000 – 150,000 t = 10 years m = 12
= 450,000
21 %
j = 21% i= =1.755 n = 10 x 12 = 120
12
Required: R=?

i
R=A
[ 1−( 1+ i )−n ]
.0175
R=450,000
[ 1−( 1.0175 )
−120
]
R=450,000 ( 0.0199932 )
R=P 8996.93

1−( 1+i )−(n−k)

A50=R [ i ]
1− (1+i )−(n−k)
A50=8996.93
i [ ]
1− (1.0175 )−(120−50 )
A50=8996.93 [
.0175 ]
A50=8996.93 ( 40.1779027 )=P 361,477.59

Equity= A− A 50
¿ 450,000−361,477.59
¿ P 88,552.41
Exercise
1. Eunice buys a color television set worth P14,000. She is to pay it in 8 monthly installments
starting next month. If interest rate is 15% compounded monthly, find the monthly payment?
Solution:

2. A P50,000 loan is to be amortized each quarter over 4 years. The interest rate is 21%
compounded quarterly in the first 2 years and 20% compounded quarterly thereafter. Find the
quarterly payments.
Solution:

3. Joel bought a house and lot worth P750,000 to be repaid monthly installment for 4 years. Find the
monthly installment if money is worth 21% compounded monthly.
Solution:

4. Clarise buys jewelry worth P100,000. She pays P40,000 and the balance on monthly installment
for 3 years. If the interest is at 15% compounded monthly. Find the monthly payment.
Solution:

5. A P200,000 debt is to be amortized in 30 payments every 3 months. Find the quarterly payment
and the outstanding balance after the 15th payment. Money is worth 14% compounded quarterly.
Solution:

6. The cash price of an office equipment is P48,700. Ms. Quintain purchased on installment basis.
She paid P18,000 down and the balance to be paid by equal monthly payments for two years.
Money is worth 18% compounded monthly, find:
a) The monthly payment;
b) The outstanding balance after the 5th payment; and
c) The outstanding balance after 1 year;
Solution:

7. Renato promises to pay P8,000 at the end of each 3 month for 3 ½ years to pay a loan bearing
interest at 15% compounded quarterly;
a) How large is his debt?
b) How much is his outstanding balance after two years?
c) How much is his outstanding balance after three years?
Solution:

8. Millet borrowed P300,000. To pay his debt, she is requested to pay the sum every 6 months for 4
years, money is worth 17% compounded semi-annually. Find:
a) The semi-annual payments;
b) The outstanding balance after 1 ½ years;
c) The outstanding balance after 2 ½ years.
Solution:

Amortization Schedule
 An amortization schedule is a listing of principal and interest included in each periodic loan
payment as well as a statement of balance still owed.

Example 5
Mr. Jack Perez borrowed P40,000 from a bank to buy a mimeo graphing machine. The bank
charges interest on the loan at 19% compounded quarterly. If the loan is to be paid in 2 years,
a) What must be the quarterly payment?
b) What was the total of his payment?
c) How much interest did the payment include?

Period Periodic Payment on Interest Repayment on Outstanding

Payment Principal Principal
0 P40,000.00
1 P6,126.48 P1,900.00 P4,226.48 P35,773.52
2 P6,126.48 P1,699.24 P4,427.24 P31,346.28
3 P6,126.48 P1,488.95 P4,637.53 P26,708.75
4 P6,126.48 P1,268.67 P4,857.81 P21,708.75
5 P6,126.48 P1,037.92 P5,088.56 P16,768.38
6 P6,126.48 P796.21 P5,330.27 P11,438.11
7 P6,126.48 P543.31 P5,583.17 P5,854.94
8 P6,126.48 P278.11 P5,854.94 0
P49,011.84 P9,011.84 P40,000.00

Given: A = P40,000 m=4

j = 19% i = 4.75%
t = 2 years n=8
Req’d: R=?
To solve for the periodic payment

i
R=A
[ 1−( 1+ i )−n ]
0.0475
R=P 40,000 ( 1−1.0475 )
R=P 6,126.48

The outstanding principal at the beginning of the period is the original loan P40,000. The interest
rate per period is 4.75%. The interest in the first quarter is P40,000 (0.0475) = P1,900. The payment to the
principal is P6,126.48 - P1,900.00 = P4,226.48. The outstanding principal at the beginning of the second
quarter is P40,000 – 4,226.48 = P35,773.52.
The total payment made is nR = 8 (P6,126.48) = P49,011.84. The total interest is P49,011.84 -
P40,000 = P9,011.84.
 Given the problem in example 1, find how much of the 4 th payment goes to pay the interest and
how much goes to repay the principal.

I 4= (OB 3 ) i=26,708.75 ( .0475 ) =P1,268.67

R=R−I =6,126.48=1,268.67=P 4,857.81

Example 6
A mortgage of P80,000 is to be repaid by an annual payments over a period of 10 years. If the
interest rate is 15.8% effective,
a) Calculate the annual payment;
b) Construct an amortization schedule;
c) Find the total payment made; and
d) Find the total interest paid.
Solution:
Given: A = P80,000 n = 10
i = 15.8% t = 10 years
Required: R=?

i
R=A
[ 1−( 1+ i )
−n
]
.158
R=80,000
[ 1−( 1.158 )
−10
]
R=80,000 ( 0.2053626 )=P 16,429.01
Perio Periodic Payment Payment on Interest Repayment on Principal Outstanding Principal
d
0 P80,000.00
1 P16,429.01 P12,640 P3,789.01 P76,210.99
2 P16,429.01 P12,041.34 P4,387.67 P71,823.32
3 P16,429.01 P11,348.08 P5,080.93 P66,742.39
4 P16,429.01 P10,545.30 P5,883.71 P60,858.68
5 P16,429.01 P9,615.67 P6,813.34 P54,045.34
6 P16,429.01 P8,539.16 P7,889.85 P46,155.49
7 P16,429.01 P7,292.57 P9,136.44 P37,019.05
8 P16,429.01 P5,849.01 P10,580.00 P26,439.05
9 P16,429.01 P4,177.37 P12,251.64 P14,187.41
10 P16,429.01 P2,241.61 P14,187.41 0
P16,4290.10 P84,290.11 P80,000.00
Amortization with Final Irregular Payment

If a loan A is to be amortized by payments of R over a period. The number of periodic payments

must be determined. Usually, the final payment will be less than the regular payment.

Example 7

A P50,000 loan is to be amortized at P500 each month. A final payment is made one after the
last regular deposit. If the interest is 15.06% compounded monthly,

a) How many regular payments are needed?

b) How much is the final irregular payment?

Solution:

Given: A = P50,000 R = P4,500

j = 15.06% m = 12

Required: n = ?

To find the number of regular payments

Ai
n=
(
log 1−
R )
−log ( 1+i )

P 50,000 ( .01255 )

n=
[
log 1−
P 4,500 ]
−log 1.01255
log 0.8605556
n=
−(0.0054165)
−0.0652211
n=
−(0.0054165)
n=12.04
To solve for the last irregular payment,

Let x be the 13th payment

n+1 [ ( 1+i )n−1 ]

x= A ( 1+i ) −R ( 1+i )
i

13 [ ( 1.01255 )12−1 ]
x=P 50,000 (1.01255 ) −P 4,500 ( 1.01255 )
.01255
x=P 50,000 (1.1760187 )−P 4,500 ( 1.01255 ) (12.809125 )
x=P 58,800.93−P 58,614.26
x=P 186.67

Example 8

A mortgage of P100,000 is to be amortized at P8,000 every quarter. A final payment is made 3

months after the last regular payment. If interest is at 21% compounded quarterly, a) how many regular
payments will be required?, B) how much is the outstanding balance after the last regular payment?,
how much is the final irregular payment?

Solution:

Given: A = P100,000 j = 21%

R = P8,000 m=4

Required: n = ?

Ai
n=
(
log 1−
R )
−log ( 1+i )

100,000 ( .0525 )

n=
[
log 1−
P 8,000 ]
−log(1+.0525)
log(0.34375)
n=
−log (1.0525)
−0.4637573
n=
−(0.0222221)
n=20.87
Twenty regular oayments are required.

Example 9

A P85,000 loan is to be amortized at P15,000 every 6 months at 17% payable semi-annually.

a) Find the outstanding principal at the end of 2 years.

b) What part of the 5th payment is for interest? For the principal repayment?
c) Find the final payment.

Solution:

Given:

Required: