MODULE 5 WEEK NO.

12
Pamantasan ng Lungsod ng Maynila
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COURSE CODE: MATHEMATICS OF INVESTMENT
Semester of A.Y. 2020-2021

Introduction

Amortization is the gradual extinguishment of any amount over a period of time, that is, the
extinction of a debt, principal and interest by means of a sequence of equal periodic payments or
installment payments due at the end of equal intervals of time. Usually, the equal payments form an
annuity.

Sinking fund is a savings fund, productively invested, into which equal periodic payments are made.
It is designed to accumulate a specific sum of money within a specified date. A sinking fund is created with a
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definite end in view, such as big expenses in the future.

Rationale

These two concepts are the most common transactions that an individual may avail with a financial
intermediary. Hence, determining how the amortization table and sinking fund schedule is created will be of
high importance to a person.

A person who decides to terminate an existing loan may refer to the amortization table and
determine how much still is his remaining debt, interests earned and future interests that he needs to pay
should he decide to continue with the financial plan provided to him by the bank through the amortization
table.

On the other hand, a person who decided to build his wealth through investments will find the
sinking fund schedule important in finding how much money should a person have at a given period,
interests that the investment earned and its future earnings. Should the investor decided to terminate the
investment the current value is reflected through the schedule.

Intended Learning Outcomes

At the end of the module, students are expected to;

1. Compare the difference between amortization table and sinking fund schedule.
2. Create an amortization table and a sinking fund schedule applying the concepts learned in annuity
computations.
3. Determine the value of the loan or investment on a given period.

Activity

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Additional Materials
To learn more about the topic, watch and ponder on the following videos:
1. 1. Constructing an Amortization schedule by HCCMathHelp. https://www.youtube.com/watch?
v=9Vm_X6023Yk
2.Discussion
2. How to create a loan amortization schedule using Google sheets/MS Excel by Income Digs.
https://www.youtube.com/watch?v=6g0OrQrVdJY
4.1 Amortization of Debt

When debt is amortized by equal payments at equal intervals, the debt becomes the present value
of an ordinary annuity (Ao); hence, we apply the formula of an ordinary annuity.

For the present value:

[ ]
−(n)
1−(1+ i)
Ao=R
i

For the periodic payment:

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Ao(i)
RAo= −n
1−( 1+i)

In this discussion, we assume that all payments were made at the end of each payment interval,
otherwise use the necessary formula of the given annuity.

Amortization of Schedule is a table which shows how much of the series of payments is allotted in
reducing the principal (outstanding balance) and how much is used to pay the interest. This will also inform
the borrower the outstanding principal or remaining liabilities after each payment period.

The following concepts comprise the amortization table:

a. Payment number (or the letter n) refers to the frequency of payments that the borrower needs to
settle to extinguish the loan.
b. Unpaid balance is the remaining debt to be paid by the borrower.
Unpaid balance = Previous balance - Principal repaid.
c. Interest paid is the part of the regular payments that is rendered to the interest.
Interest paid = Unpaid balance x i
d. Periodic payments refer to the size of each payment (R).
e. Principal repaid is the amount deducted from the outstanding balance.
Principal repaid = R – interest paid

Let us work on the following examples to illustrate the above.

Illustrative Examples:

1. A loan of A = P4,000 is to be amortized by equal payments at the end of each quarter for t = 1 year
and 6 months. If interest is j = 5% compounded m = quarterly, find the (R) periodic payment and construct

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 MODULE 5 WEEK NO.12
an amortization schedule (table).

Given:

A= P4,000 j = 5% m = 4; t = 1 year and 6 mos.

Solution:

i = 5% / 4 = 1.25% n = 1 6/12 x 4 = 6

4000(.0125)
RAo= −6
=696.14
1−( 1+.0125 )

Amortization Schedule

Payment Unpaid Interest Periodic Principal

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Number (n) Balance Paid Payment Repaid

1 P4,000 4000 x .0125 = P50 P696.14 696.14 – 50 = P646.14

2 4000 – 646.14 = 3,353.86 41.92 696.14 654.22

3 2,699.64 33.75 696.14 662.39

4 2,037.25 25.47 696.14 670.69

5 1,366.58 17.08 696.14 679.06

6 687.52 8.59 696.14 687.55

P176.81 P4,176.84 P4,000.03

Note:

1. As to be expected, the interest paid decreases each payment (since the debt is getting
smaller), and the payment towards reduction of the obligation increases correspondingly.

2. The total principal repaid is equal to the original loan, if in case, discrepancy is more than
P1.00, repeat the process.

2. A loan of 6 semiannual payments of P450 are to be made to pay for a loan at 5 ½% compounded
semiannually. Find the value of the loan and construct an amortization schedule.

Given:

R = P450 j = 5 ½% m=2 n =6

Solution:

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i = 5 ½% / 2 = 2 ¾%

[ ]
−(6 )
1−(1+.0275)
Ao=450 =2,458.07
.0275

Amortization Schedule

Payment Unpaid Interest Periodic Principal

Number Balance Paid(2.75%) Payment Repaid

1 (semi) P2,458.07 P67.60 P 450 P 382.40

2 2,075.67 57.08 450 392.92

3 1,682.75 46.28 450 403.72

4 1,279.03 35.17 450 414.83

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5 864.20 23.77 450 426.23

6 437.97 12.04 450 437.96

P241.94 P2,700 P2,458.06

4.2 Sinking Fund Schedule

A sinking fund schedule is a table showing the gradual growth of money deposited to create a fund.
It also shows how much interest is earned every period, and the amount before and after and the amount
before and after periodic deposits.

To create a sinking fund, we should know the periodic payment or deposit, and the sum we wish to
have. We apply the formula of an ordinary annuity.

For the final amount:

So=R [ ( 1+i )n−1

i ]
For the periodic payment:

So(i)
RSo= n
(1+i) −1

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The following concepts are used in a sinking fund schedule:

a. Number of payments (or the letter n) refers to the frequency of deposits/investments in order to
accumulate a certain amount.
b. Periodic deposits (R) is the amount of each investment made.
c. Interest in fund refers to the amount of earnings made by the deposits.
Interest in fund = Amount in fund x i
d. Increased in fund is the amount of money added to the investment (including the interest earned)
Increased in fund = Periodic deposit + interest in fund
e. Amount in fund is the current amount of deposits/investment at a given payment interval.
Amount in fund = Previous amount in fund + Increased in fund

Let us work on the following examples to illustrate the above.

Illustrate Example:
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1. The sum of P3,500 will be needed at the end of 3 years by investing an amount of money every end of 6
months. If money can be invested at 5% compounded semiannually, find:

a. the periodic payment;

b. construct a sinking fund schedule.

Given:

S=P3,500; j = 5% m=2; t = 3 years

Solution:

i = 5%/2 n = 3x2

= 2 ½% =6

a. Periodic Payment ( R )

3500(.025)
RSo= 6
=547.92
(1+.025) −1

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b. Sinking Fund Schedule

No. of Periodic Interest Increased Amount

Payment Deposit In fund In fund In fund

1 P547.92 P0 P547.92 P547.92

2 P547.92 547.92 x .025 =13.70 561.62 547.92 + 561.62 =1,109.54

3 P547.92 1109.54x.025=27.74 575.66 1,685.20

4 P547.92 42.13 590.05 2,275.25

5 P547.92 56.88 604.80 2,880.05

6 P547.92 72.00 619.92 3,499.97*

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Sometimes the final amount is lesser or greater by a few centavos than what it should be, due to rounding errors.

2. A deposit of P360 will be invested at 5 ½% compounded quarterly, for 2 years.

a. Find the amount at the end of the term.

b. How much is in the fund just after the 5 th deposit?

c. Form a sinking fund table showing the growth of the fund for 2 years.

Given: R = P360 j = 5 ½% m=4 t = 2 years

Solution for a:

i=5 ½%/4 n=2x4

= 1.375% =8

So=360 [ ( 1+.01375 )8−1

.01375 ]
=3,022.48

Solution for b:

So=360 [ ( 1+.01375 )5−1

.01375 ]
=1,850.19

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c. Sinking Fund Schedule

No. of Periodic Interest Increased Amount

Payment Deposit in fund in fund in fund

1 (3 mos) P360 P0 P360 P360

2 (3 mos) P360 360 x .01375=4.95 364.95 364.95 + 360 = 724.95

3 (3 mos) P360 724.95 x .01375=9.97 369.97 1,094.92

4 (3 mos) P360 15.06 375.06 1,469.98

5 P360 20.21 380.21 1,850.19

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6 P360 25.44 358.44 2,235.63

7 P360 30.74 390.74 2,626.37

8 P360 36.11 396.11 3,022.48

IF payment is done at the start (Annuity due)

No. of Periodic Interest Increased Amount

Payment Deposit in fund in fund in fund

1 (Jan - Mar) P360 x .0137 = 4.95 364.95 P364.95

2 (Apr - Jun) P360 (364.95+360) x .01375= 9.97 369.97 734.92

3 (Jul – Sep) 360 (734.92+360) x .01375 = 15.06 375.06 1109.98

Exercise

Solve each of the following:

1. A debt of P3,500 is to be amortized by 6 equal semiannual payments with interest at 6%

compounded semiannually. Find the periodic payment and construct an amortization schedule.

3500(.06 /2)
RAo= −6
=646.09
1−( 1+.06 / 2)

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 MODULE 5 WEEK NO.12
Amortization Schedule

Payment Unpaid Interest Periodic Principal

Number Balance Paid Payment Repaid

1 (semi) 3500 x .03 = 105 646.09 646.09 – 105 = 541.09

2 2958.91 x .03 = 88.77 646.09 557.32

3 2401.59 x .03 = 72.05 646.09 574.04

4 1827.55 x .03 = 54.83 646.09 591.26

5 1236.28 x .03 = 37.09 646.09 609

6 627.28 x .03 = 18.82 646.09 627.27

376.56 3876.54 3499.98

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Amortization Schedule

Payment Unpaid Interest Periodic Principal

Number Balance Paid Payment Repaid

1 3500 105 646.09 541.09

2 2958.91 88.77 646.09 557.32

3 2401.59 72.05 646.09 (646.09 x 3 = 1938.27) 574.04

4 1827.55 54.83 646.09 591.26

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5 1236.30 37.09 646.09 609.00

6 627.29 18.82 646.09 627.27

376.56 3876.54

2. A loan of P8,000 is to be repaid with equal quarterly payments for two years with an
interest rate of 4% compounded quarterly. Find the quarterly payment and construct an
amortization table.

3. Monthly payments of P800 each are used to settle a loan for 8 months at 8% compounded
monthly. Find the present value of the loan and construct an amortization table.

4. Semiannual payments of P960 each are used to repay a loan for 4 years at 5% compounded
semiannually. Find the amount of the loan and construct an amortization schedule.

5. A sala set costs P6,800 cash. A buyer pays P2,500 down payment and the balance will be
paid by equal monthly installment payments for 8 months with interest rate of 6%
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compounded monthly. Find:

a. the monthly payments:

b. construct an amortization schedule.

6. How much must a man place in a fund at the end of each month to have P12,500 at the end of 4
years, if money is worth 7% compounded monthly? Construct a sinking fund table for 6 months.

12500(.07 /12)
RSo= 48
=226.41
(1+.07 /12) −1

No. of Periodic Interest Increased Amount

Payment Deposit In fund In fund In fund

1 226.41 0 226.41 226.41

2 226.41 x .07/12 = 1.32 226.41 + 1.32=227.73 454.14 = 226.41 + 227.73

3 226.41 2.65 229.06 683.20

4 226.41 3.99 = 7.96 230.40 913.60

5 226.41 5.33 231.74 1145.34

6 226.41 6.68 233.09 1378.43

1358.46 19.97

7. What quarterly deposit into making fund earning 4 ½ % compounded quarterly necessary in

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accumulate P 7,500 in 1 year and 9 months and construct a sinking fund table?

8. Construct a sinking fund table showing the growth at the fund over 5 years, P950 is to be
deposited at a rate of 6 % compounded semiannually.

9. A fund with P2,500 quarterly payments with an interest of 3 ½ % compound quarterly is made for
4 years, construct a table showing the growth of the fund.

10. How much must be deposited in the fund at the end of each 6 month for 12 years to raise P
25,000 if money is worth 5% compounded semiannually? Make the first 6 line of the sinking fund
table?

Assessment

At the end of the topic, a short 20 item quiz (5-word problems) will be given and uploaded in MS Teams.

Solve each of the following:

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1. An obligation will be amortized by quarterly payments of P670 for 10 years. If interest is at 6%

compounded quarterly, find:

a. the present value of the loan;

b. the outstanding principal after 7 years;

c. the remaining liability just after the 30 th payment;

d. how much of the 20th payment is interest, and how much goes to principal?

2. A debt of P12,500 is to be amortized by payment at the end of each month for 8 years. If money is worth
5% compounded monthly, find:

a. the monthly payment;

b. the remaining liability just after the 15 th payment;

c. the outstanding just after 3 years;

d. how much of the 25th payment goes to interest, and how much goes to principal?

3. Construct a sinking fund schedule showing the growth, of the money over 9 years if P2,200 is to be
deposited at a rate of 7% compounded annually. How much is in the fund after 5 years?

4. A deposit of P850 will be invested at 6% compounded quarterly.

a. How much is in the account at the end of 6 years and 9 months?

b. Create a sinking fund table for the first 2 years.

Reflection

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Why do you think amortization table is an important document for the consumer to have? What about the
sinking fund schedule for the investor? Explain.

Resources and Additional Resources

Bautista, L. , et. al. (2018). Mathematics of Investment. 2nd Edition. Quezon City: C & E Publishing.

Caras, M., et. al. (2018). Mathematics of Investment. Revised Edition. Manila: Booklore Publishing Corporation.

Mishra, S. Corporate Finance: Amortization- Basics. Retrieved November 3, 2019 from

http://www.algebra.com/algebra/homework/Finance/amortization-1.lesson

Ong, A. & Gabriel, P. (2017). Elements of Investment Mathematics. Manila: Rex Book Store.
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