Amortization

Amortization is any method of repaying a debt, the principal and interest included, usually by

a series of equal payments at equal interval of time.

Examples:

1. A debt of P5 000 with interest 12% compounded semiannually is to be amortized by equal

semiannual payments over the nest 3 years, the first due in 6 months. Find the semiannual payment

and construct an amortization schedule.

P5 000

0 1 2 3 4 5 6

A A A A A A

A = P/ P/A, 6%,6 = P5 000 / 4.9173 = P1 016.82

Table 2. Amortization schedule

Period Outstanding principal Interest due at the Payment Principal repaid

at beginning of period end of period at end of period

1 P5 000 P300 P1 016.82 P716.82

2 P4 283.18 P256.99 P1 016.82 P759.83

3 P3 523.35 P211.4 P1 016.82 P805.42

4 P2 717.93 P163.08 P1 016.82 P853.74

 5 P1 864.19 P111.85 P1 016.82 P904.97

6 P959.22 P57.55 P1 016.82 P959.27

Total P1 100.87 P6 100.92 P5 000.05

2. A debt of P10 000 with interest at the rate of 20% compounded semiannually is to be

amortized by 5 equal payments at the end of each 6 months, the first payment is to be

made after 3 years. Find the semiannual payments and construct an amortization schedule.

(A = 4248.5)